Decent B2B payment behaviour going downhill
The Graydon Payment Index provides an indication of the extent to which companies pay their invoices to one another. In the third quarter of 2017, the index fell to a value of 101.5, which was the lowest level seen since the beginning of 2014.
Graydon has been reporting on the payment behaviour of its B2B customers since 1984. In 2002 we developed the Graydon Payment Index with the aim of monitoring the effects that the introduction of the first round of legislation had on B2B payment behaviour. The values measured back then were based on the index value of 100. In the period prior to the global financial crisis, in particular during the period from 2006 to 2008, the index value rose gradually. Put another way, the quality of payment behaviour was systematically improving. A few months before the GFC crashed around us (September 2008), we saw a sudden decline in this payment index. This decline became worse during the crisis, reaching a low point in 2011.
From the third quarter of 2014 onwards, though, the crisis had worked its way through in the main. Belgian companies were paying their invoices a good deal more properly again and the Payment Index began to rise. Payment arrangements were better complied with and we also noticed – particularly in bigger companies – debtor management had become a lot more professional. As a result, smaller companies had to abide more strictly with the arrangements made. During the fourth quarter of 2015, the Payment Index peaked at 105.8. But since then it has gradually gone downhill, reaching a provisional low point last quarter.
Volume of payment defaults up by 35.67%
In the fourth quarter of 2015, 71.37% of the invoices sent to companies and government departments were still being paid on time. Since the second quarter of 2017, that figure has been just 68.3% of invoices paid correctly. That may not sound very dramatic, but when you realise that the number of payment defaults (invoices not paid or not paid in full more than 90 days after their due date) is again rising sharply, this becomes very disquieting. In the period 2015-2016, this figure was still between 8% and 9% of invoices. But since the fourth quarter of 2016, it has risen abruptly. Last quarter, it rose to as much as 11.41%. So, for example, if we compare the percentage of payment defaults in the third quarter of 2016 (8.41%) with the most recent third quarter (11.41%), payment defaults have risen by over 35.6%.
This means – if you take no preventative measures – that for every 100 invoices that you send out, an additional two to three invoices will not be paid or not paid in full after 90 days.
Insufficiently profitable to loss-making
The fact that 1 in 8 invoices is not paid or is paid late weighs heavily on the cash position of companies. Payments made with this degree of delay mean that transactions become insufficiently profitable and, in virtually all cases, even loss-making.
The consequences are self-evident. The only thing that can happen is that this situation results in an increase in the number of companies encountering (financial) difficulties, or having to consider invoking the Business Continuity Act or even applying for bankruptcy. Purely and simply as the result of their customers defaulting on their invoices.
This means that company managers have to be more vigilant than ever. Nearly 1 invoice in every 8 being defaulted on means a negative effect in a company’s liquidity. So it remains important to keep shining the spotlight on the payment behaviour and financial situation of business partners. That way, companies can avoid running into difficulties themselves.
Late payments also generate additional finance charges, which may turn possible investment or acquisition plans on their head.
1 in 20 healthy companies pay late
In our study into payment behaviour relating to the first quarter of 2015, we showed that payment defaults are usually the result of (serious) financial problems within the debtor company. It is not true that payment defaults on the part of the debtor are the result of an ethics or organisational problem. Most healthy companies pay correctly. But within the group of healthy companies, we also recorded one company in every twenty paying its invoices late.