Do not be surprised if your customer asks for an extension to repay their debt. That is the current trend in the financial world. A recent survey on working capital found that extended repayment terms are on the rise.

A request for an extended repayment period may be a sign of trouble. It could also be a sign of a “new way of managing cash flow,” regardless of the ability to repay a debt or cash flow status of the business.

3 global working capital trends

In its 2016 survey, The Hackett Group evaluated the top 1000 largest global corporations using the following three business metrics:

Days Sales Outstanding (DSO) – expressed as Accounts Receivable / (Annual Sales / 365 days) or Accounts Receivable / Average Sales per Day, this estimate is typically used to monitor average collection period on a monthly basis.

Days Payable Outstanding (DPO) – defined as Ending Accounts Payable / (Cost of Sales / 365 Days), this metric is used to tell how long it takes a company to pay off its trade creditors’ invoices (e.g. suppliers)

Days Inventory Outstanding (DIO) – calculated as (Inventory / Cost of Sales) * 365 Days indicates how long it takes a company to turn inventory into sales

These three together are used to compose the Cash Conversion Cycle (DIO + DSO – DPO) which is a very good overall metric for how long it takes a company to turn a unit of net money (Pesos, Dollars, Yen, what have you) into cash via customer sales.

Flat Receivables

Seven years after the Subprime Mortgage Crisis’ effect on the world, companies have put measures in place to cut down DSO and tighten cash conversion cycles. The survey, however, shows there has not been any further improvement in the past three years. That means there are still a few opportunities to generate efficiency in DSO.

Increase in Payables

Large companies are steadily growing their payables. The survey report links this growth to the extension that suppliers are giving to their big customers, which grant up to 75, 90, and sometimes 120 days to pay what they owe even when the customers are expected to pay within 30 days. It is possible your company may be doing the same. The global standard as of now is Net-60. However, some companies are pushing it to between 90 and 120 days.

Rise in Inventory

Inventories have been on the increase as more companies choose to use offshoring to cut down costs. The offshoring extends the lead times, supply chain, as well as the working capital that is tied in inventory.

The Hackett Group survey found that more companies are employing permanent measures to manage credit terms. These measures are not just being applied on a short-term basis to deal with short term issues. Companies are using them for the long-term to address issues that might come up in the future. More companies are expected to adopt this strategy when interest rates rise.

Three factors to consider when a customer asks for repayment extension

Know Your Customer

Requests for extensions are becoming a global norm. You need to know your customer well enough to find out why they want an extension. It could be that it is just a form of leverage they know they have and wish to benefit from.

Analytics-Based Credit Decisions

The best way to determine financial risk is to examine patterns that indicate financial distress. Using data analysis is the best way to assess financial risk. Past banking information is one of the best ways to create a customer's financial patterns. But what of those with little to no banking transactions?

Look Beyond Payment History

To get a clear picture of your prospective customer’s ability to repay, the automated pre-clearance tool CreditBPO Rating Report® is the new norm. Driven by financial technology, its algorithm analyzes a company’s financial condition, management quality, position within the industry, and its prospects for growth. As a robust Know Your Customer (KYC) tool, this innovation will help you recognize red flags that are indicative of financial risk.