Payment behaviours are likely to deteriorate in 2023 while the global liquidity gap of US$30 trillion is here to stay, said Allianz Trade recently when releasing a report on payment trends and working capital requirements.
Costly operations. Global Working Capital Requirements (WCR) for listed companies increased by +9 days to 72 days of turnover in 2022 – the largest annual increase since 2008 – following an increase of 3 days in 2021.
Asia Pacific (+10 days to 77 days of turnover inclusive, +15 to 59 days in China and +2 in Japan) and Western Europe (+7 days to 68 days) recorded the strongest increases, while North American and CEE firms only registered +6 additional days of WCR.
Lower growth, higher inflation, the higher cost of financing and more non-payments explain this rise of WCR.
As a result, companies are spending a lot of their financial resources just running the business and less on investment, product development, geographical expansion, acquisitions, modernisation or debt reduction.
Pay me later, maybe. Day sales outstanding (DSO) and days inventories outstanding (DIO) equally contributed to the annual rise in WCR, increasing by +5 days to 59 and 50 days, respectively, while DPO modestly accelerated (+1 to 36 days).
DSO as an accounting metric measures the average number of days a businesses receives payment for goods and services purchased on credit, while DIO is a working capital management ratio that measures the average number of days a company holds inventory before it’s turned into sales.
This fast DSO increase means deterioration in payment behaviours — the number of days it takes a company to receive payment for a sale is increasing. This also suggests that more companies are and will be experiencing delays in receiving payments, which can result in cash flow problems.
Such trends in payment behaviours would lead to higher liquidity risk in the system. Overall, 17% of companies worldwide are paid after 90 days while suppliers’ role as the invisible bank is coming back in full force.
Just in time to just in case. Similarly, the physical supply disruptions of 2021 continued to affect corporate balance sheets.
The shift from “just-in-time” inventory management to “just-in-case” turned shortages into oversupply.
Today, 34% of companies have inventories exceeding 90 days of turnover, with four sectors noticeably most exposed: transport equipment (46%), textiles (39%), electronics (38%) and machinery equipment (36%).
In 2023, more of the same. Allianz Trade forecasts that global WCR to remain broadly stable. Both DSO and DPO should increase slightly (+5 combined) while DIO should decrease by about the same.
Indeed, in a context of slowing economic activity, oversupply in manufacturing sectors and tightening financial conditions, inventories are likely to decrease while payment delays should increase as in previous economic downturns.
Liquidity matters. Looking at the entire universe of companies, well beyond listed companies and including SMEs, Allianz Trade’s proprietary calculation of the global B2B liquidity gap is expected to remain stable at around US$30 trillion, with the US and Europe accounting for US$5 trillion each, and China representing a record US$12 trillion.
In this period of uncertainty, the greatest financial relief one can give small and mid-sized businesses is faster payment of their outstanding invoices, and improved credit-management practices.
The trillions tied up in receivables for small and mid-sized businesses worldwide continue to be both an impediment to growth and a major source of credit risk.