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National Habits Complicate Working Capital Management

August 13, 2012
Commercial_and_Enterprise
Patricia McGinnis
Mercator Advisory Group
For many businesses, a measure of success in the treasury area is the firm’s ability to keep its days sales outstanding (DSO) as low as possible, and preferably below thirty days. Citing research from REL Consulting, a division of The Hackett Group, CFO Magazine reports that when a firm has international customers, it should expect to encounter cultural differences in payment practices, and different views about working capital.

REL Consulting studied 925 companies with a particular focus on European firms. The data showed that Spanish and Italian firms were the worst at collecting receivables promptly, with DSO commonly between 70 and 75 days. Not surprisingly, firms in those countries also took longer to pay their own bills. The disparity between bill payment practices and receivables collection practices was found to be greatest in Germany and the Scandinavian countries. Firms of those nationalities typically paid their bills relatively promptly (with days payables outstanding of 30-35). However, they were far less efficient at collections, with DSO around 50, with associated greater strain on available working capital.

The diversity of national norms about bill payment, and expectations about bill collection, will result in rather different outcomes from country to country for those firms attempting to move to electronic invoice management, electronic matching, and electronic bill payment. It is challenging enough just within the U.S. market to understand how electronic payment and its associated acceleration of these processes works differently to the benefit or detriment of buyers and suppliers. Firms with multinational customer and supplier relationships will have to be prepared for even more complexity. At the least, firms should use counterparty nationality as a variable in the metrics monitoring their ability to collect receivables efficiently. 

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