by Anthony Coundouris, trade finance evangelist for ApexPeak
Across Asia Pacific, the average number of days for an invoice to be paid rose from 48 to 56, compared to the same period in the previous year.1
In the same year, Singapore did not improve its credit terms with export customers either. A total of 30 per cent of business-to-business (B2B) invoices issued to foreign companies were paid late and 6.5 per cent were written off as uncollectable.
In an economy where 50 per cent of exports are traded on an open account (i.e. credit terms), a rise in daily sales outstanding, or DSO, affects the cash flows of local businesses.
DSO is the average number of days that a company takes to collect revenue after a sale has been made. Cash-flow problems spell disaster for young businesses growing overseas accounts. Suppliers may be left short when paying their next order or not have sufficient cash reserves to meet the payroll.
According to The Economist forecast for 2015, ASEAN will add USD 335 billion and become the fourth largest economy in the world. Understanding and managing cash flow will be crucial to riding the growth curve.2
Reasons why we pay late.
The reasons why customers pay late are no mystery. Every business owner at some time has paid a supplier late. Research has found three reasons why foreign customers were late paying Singapore suppliers1:
- Financial problems
- Complexity of the payment procedure
- Dispute over the invoice
Unfortunately, a fourth and more difficult reason is that customers intentionally pay late. In a survey conducted in Europe, 60% of respondents said intentional late payment was the major cause of hikes in DSO.
If an overseas customer is not able to settle an account due to liquidity problems, sourcing local finance to bridge the gap is an option. Banks are not the only source of capital. According to Piyush Gupta, Chief Executive, DBS, “Strong economic growth and the requirements of Basel III could leave Asian banks facing a USD 1 trillion capital shortfall within five years1.”
It is expected many SME business owners may turn to alternative financing, which in the UK has grown to a EUR 1.7 billion pa industry, and is starting to gain traction in Singapore.
Tactics for getting paid early.
Luckily there are a few measures suppliers can take to both improve DSO and reduce uncollectable receivables.
1. Benchmark the industry DSO.
Some industries are slower to pay than others. Suppliers in the manufacturing, pharmaceutical, technology or professional services space, need to pay special attention, as these industries have above average DSO.
2. Calculate your company’s DSO.
Take your company’s accounts receivable and divide the number by the annual sales divided by 365, and then divide by the days in period. If you turn up a figure less than 50 days, you are in front.
3. Watch your accounts receivable.
The accounts receivable turnover ratio is your annual net sales divided by your annual accounts receivable. The higher the number, the more efficient your collection. A number of 2 indicates the firm collects payments twice a year.
4. Forecast cash flow.
Identify where cash is moving in and out of the business month-on-month. Cloud-based accounting applications like Spotlight make it easier. While cash-flow forecasts require skill and patience to prepare, they can sound alarm bells before a liquidity crisis strikes.
5. Alternative financing.
There are a handful of non-bank capital providers willing to provide an advance on an invoice, without having to collateralise plant or equipment. This is a more scalable option for businesses just starting up or with assets already encumbered. Use this method in conjunction with cash-flow tools by identifying invoices that ought to be advanced early.
6. Asset-based loans.
You can take out loans against the physical assets of the business, like machinery and inventory. Banks are prepared to finance at rates as low as 1 per cent, provided the plant and equipment are available to collateralise. The rates can be low, but the term can be as much as 12 months.
7. Credit checks and insurance.
Unfortunately, 6.5 per cent of all receivables to overseas buyers will not be collected by Singapore suppliers. Run thorough credit checks on the businesses you plan to collect more than USD 20,000 from per annum. Credit insurance is also an option. Credit insurance plays a critical role in ensuring successful international B2B trade, as it covers the risk of financial loss that can occur when trade credit is offered and a bad debt occurs.
8. Set credit limits.
Impose a limit on the amount a buyer can have outstanding at any one time. Insist the amount is cleared before future shipments are made.
9. Switch to e-invoicing and reduce errors.
Once an erroneous invoice has been introduced into a customer’s accounts payable system, it can take weeks to flush it out and replace it with an updated and correct version. Switching to e-invoicing allows users to convert a purchase order into an e-invoice with a click of the mouse. No cutting and pasting of content is required, reducing the chance of errors.
10. Practise disciplined invoice etiquette.
As a rule of thumb, invoice as quickly as you can. Insist on invoicing before the goods land. Stick to the terms of payment. If the terms are 30 days, expect payment in 30 days. The longer an invoice is overdue, the harder it becomes to recover. Prevention is better than a cure.
11. Offer multiple payment options.
Complexity over the payment method was cited as a factor driving up DSO. A bank wire is not always a convenient mode of payment, especially for customers in China who do not use internet banking. Using a credit card or PayPal bites into your profits; however, these methods can reduce DSO by as much as 30 per cent.
12. Automated reminders.
Have applications play bad cop by sending automatic reminders to accounts payable departments. For reminders to be effective, they must be consistent. If the party knows they will be pestered by automated emails, they are more likely to keep your receivable at the top of their mind. Initial reminders should have a friendly tone, and become harsh the longer the DSO.
13. Collection methods.
Recognise a foreign multinational is different from a ten-person mum-and-pop shop. Discover which channel of communication works best when sending reminders. A quick WhatsApp message followed by an email may be more effective than ten telephone calls. As a rule of thumb, set up an email address specifically for finance-related matters. You are going to want to have a different voice and perhaps another person to communicate.
14. Reduce inventory.
If you can hold less stock without adversely affecting sales, this can reduce DSO. It is found that 70 per cent of exports from China are not bought on an open account. It is likely the account is cash on delivery. From the moment a Singapore company pays a China supplier, the Singapore firm is riding a cash-flow deficit, which could stand as long as 150 days. China trades with the lowest number of open accounts in Asia, partly because its exports are in such high demand, and partly because China suppliers are short of working capital.
For a sophisticated accounts payable department, gifting could have an adverse effect on DSO. Some accounts payable professionals are trained to return gifts to the sender. Gifting should not be ruled out; however, it should never be the first option either. Although they may be unethical, in some countries they are an accepted means of doing business and improving DSO.
16. Using collection agencies.
This we do not recommend. The second most common reason why an invoice is not paid is because it is in dispute. By taking responsibility and resolving the matter directly with your customer, you improve DSO. If invoice payments are running late, implement automated reminders.
17. Delay accounts payable.
This is a last resort, and not advisable as it will brand your firm a poor paymaster and cause irreparable damage to supplier relations. On a macro level it has led some countries, like Italy, Spain and Portugal, into a vicious cycle, with billions of dollars tied up in overdue invoices.
- net, Asia’s banks face $1 trillion Basel III capital shortfall, says DBS chief. http://www.risk.net/asia-risk/news/2280315/asias-banks-face-usd1-trillion-basel-iii-capital-shortfall-says-dbs-chief
- Atradius, Payment Practices in Asia-Pacific, 2013. http://www.atradius.sg/press/press-releases/773-payment-practices-in-asia-pacific.html
- Economic Watch, Singapore’s Economic Outlook for 2015. http://www.economywatch.com/world_economy/singapore/?page=3
- Singapore Business Federation, Singapore: Your global Asia Hub. Business Services Resource Guide 2012/13. http://www.sbf.org.sg/globalasiahub/forms/SBF_English_Guide.pdf
Anthony Coundouris. brings his passion for financial technology and branding to his position as a trade finance evangelist for ApexPeak. A speaker and writer on the subject of business finance for five years, he was co-founder and director of Futurebooks, a firm providing financial services to technology startups across the Asia-Pacific region. With more than two decades of online experience, he consults for businesses on how to create digital supply chain finance and invoice discounting workflows, and how to monetise e-invoice platforms.