Late Payments: The Cheque is in the Post
It will surprise no one to hear that Europe is in many ways moving closer together. We have a single currency that has been adopted by all but a very few members of the Union, the EU has just been enlarged by 10 new members predominantly from Eastern Europe and we are seeing any number of new EC directives intended to harmonise business conduct.
If Europe is becoming as harmonised as it appears, we must ask ourselves why we still see a huge difference in payment cultures for European businesses operating across the EU. For many, typically in the northern countries of the Union, it is a matter of pride that suppliers are paid promptly; to do otherwise smacks of impropriety, whereas in a number of – supposedly harmonised – member states, the culture of late payment of suppliers has developed over many years into something of an art form.
In Italy, payment terms for a standard supplier contract are commonly quoted as being as high as 70 days. Remember though that these are the quoted payment terms; research shows that the actual period for payment to be made is typically a horrendous 81 days.
Compare and contrast these terms with those sought and achieved in Sweden, where standard terms are for payment to be made within 42 days and payment is actually made within an average of 48 days.
Before the Italians reading this feel that some slight is being made on their national character, nothing could be further from the truth; the payment terms are standard for the country as a whole and reflect the trading traditions of a country which has been a key and welcome participant in international trade for thousands of years. The payment terms reflect a culture that has developed over many years and are accepted as the norm for that country. The cost of the goods sold is simply altered to reflect the effective credit being granted by the supplier.
But as trade across Europe is increasingly dominated by the major international trading companies for whom nationality is little more than a matter of tax domicile, one might expect more standardised terms to be applied. Siemens should apply the same terms to a sale in Italy as it does to one in Germany; Ericsson should apply the same terms in Spain to those it achieves in Sweden. The evidence shows us however, that, even for these huge international firms, the local operations have gone native.
The more interesting analysis highlights the actual payment performance (as measured by day’s sales outstanding, or DSO) for each country as opposed to those promised when the trade is struck. Again the range here is enormous, the Netherlands leads the table with actual payment terms just 7 per cent longer than those promised, whereas Austria, at 47 per cent overdue, leads the list of offenders.
It is this unexpected difference that causes the problems for companies looking to expand into new territories and to manage the cashflows of a new business. It is one thing to persuade an efficient head office that long payment terms are the local norm and are therefore to be tolerated – it is quite another to report back that even those lengthy terms are not being met.
What then is the underlying cause of the difference in payment terms, and should we expect the issue to be remedied – and payment terms harmonised – as trade between an enlarged EU grows?
Methods of payment across countries and industries make a practical difference in terms of how fast you get paid by your customers: for example the Riba situation in Italy, bank transfers in Germany and direct debits in the UK are all markedly different from each other and make differences to payment terms, albeit minor ones. They do not however account for the huge ranges seen.
So what are actual cash costs of doing business in these slower paying countries? For a company with €100m turnover operating in one of the slower paying countries, the costs of funding this payment shortfall might easily amount to €5m a year. More importantly, the working capital tied up within the business will increase hugely, increasing the costs of the business with no increase in margins at all.
Slowing cash flow and the increased cost of capital that it brings about have a disproportionately damaging effect on medium and small businesses, where a delay in cash is more critical as sources of finance are far less readily accessible. As a consequence bankruptcies across Europe are up, last year in France and Germany alone there were over 80,000 bankruptcies, an increase of around 12 per cent and 27 per cent respectively, a trend reflected among the other member countries and Europe’s contribution to the global economic recovery is diminished.
All is not doom and gloom however. The aim of the EU Directive 2000/35/EC on combating late payment in commercial transactions, adopted in 2003, is to introduce new rights to businesses when claiming overdue payments, discourage late payment through fines (interest) and to create common market conditions within the EU. While adoption is clearly not yet fully reflected in a reduction in actual DSO, this is providing a common base to manage receivables. It should be noted however that similar late payment penalties introduced in the UK have had little or no effect on the late payments problem. If you do not have a strong enough relationship with your customer to insist on payment being made on time, there is little chance that you will be brave enough to impose the fines the law gives you the right to.
Integration, closer cooperation, opening of the markets to the east and increased competition through globalisation mean that the gap between the best and the worst between DSOs across Europe should decrease in the next ten years.
Doing business in Eastern Europe will also become more manageable as the new member states align to common directives. Aggressive expansion of western European firms into eastern markets also means that business conduct and expectations will converge through the export of best practice.
Can anything be done about the differences in payment performance? The short, and comforting, answer is yes. With the implementation of clear processes for debt collections and dispute management, businesses can ensure that they are focusing and prioritising activities according to added value. With insight and experience in getting paid across Europe, businesses should tailor their collection strategy and approach to each country and the industries they serve within that country.
So will the Italians start paying as quickly as the Swedes? While you should not hold your breath, those businesses adopting the right working capital strategy are more likely to see a reduction in their cost of doing business.
The prize, a Europe across which companies can genuinely trade with confidence in their cash flows and therefore their cost base, will work to the advantage of all.
This article was originally published in City to Cities Magazine