Nearly 46% of credit departments currently have lower days beyond terms (DBT) than they did two years ago, according to a recent eNews poll. However, the reasons why differ widely.
“Being a private manufacturer with little competition and loyal customers that date back to the 70s helped us retain these terms,” said Betsy Rhodes, CCE, treasurer for Metal Specialties, Inc. (Odessa, TX). In addition, companies may have benefitted from government support programs that provided them with a means to pay their employees as well as their business partners, Rhodes added.
In a follow-up eNews poll, 61% of participants indicated that customers’ move from manual payment processes to electronic payments led to the decline. With companies working remotely, mailing a traditional check became difficult, said Juanita Reyes, credit manager for Eastern Quality Foods (Ponte Vedra Beach, FL). “Customers who were against EFT started sending payments electronically because it became an attractive way to process payments with their new environment.”
Furthermore, customers are getting paid faster, giving them quicker access to cash that they can use to pay us quicker, Reyes said. Combined, technology, strong demand and adjusted processes have helped improve overall DSO, she added.
Respondents also credited DBT decreases to:
The collection department’s adjustment to the remote working environment (44%).
The customer’s AP department becoming more efficient at working and processing payments remotely (33%).
Extensions in payment terms (6%).
Company’s aligning terms with customer payment habits (6%).
New automation technology (6%).
While some respondents credited the extension of payment terms for decreases in DBT, that could present a falsepositive, warned Val Venable, CCE, ICCE. At the start of the pandemic, more companies may have extended terms to help support their customers, Venable said. However, that could affect other metrics negatively because one metric does not tell the whole story, she added. “Days beyond terms can be down; but if days sales outstanding is up, it could still result in reduced cash flow. Is it taking longer to turn the sales into cash, despite the ‘false positive’ good news of reduced days beyond terms? If the terms have not been extended, then this is really good news. But, without knowing the why and what changed, we can only speculate.”
Managing exposure risks can attribute to lower DBT as well, Reyes said. Credit professionals do not want to take on the risks of going above the customer’s credit limits because the data they collect shows how much their customers can afford. Customers need products and they need to pay quicker—sometimes ahead of terms—to avoid disrupting future orders for both parties, she continued.
Tighter oversight on your accounts receivables department is another strategy that helps lower DBT, said Christopher Roshong, credit manager at Graves Lumber Company (Akron, OH). Due to longer lead times and inflationary pricing, cash flow may be tight. Therefore, credit professionals must be conservative with customers, do their know-your-customer due diligence and act based on the communication they are having with their customers, Roshong said.
This article first appeared in eNews. It is used with permission.