Did Your Business Debt Grow Over the Past Year? How Can We Help?
It’s no secret that the level of corporate debt has soared over the past two years, thanks to the same scourges that have caused bankruptcies, defaults and other negative indicia to spike: an uneven economy, inflation, a decline in consumer spending and high interest rates.
Several reports have tracked the debt trend. In the latest published research from Creditsafe, more than half (58%) of 200 U.S. finance and accounting professionals said their company’s long-term debt had increased in the last 12 months.
Unsurprisingly, about the same proportion (61%) of those surveyed said their company’s bad debt reserve had risen by more than 10% over that time period. Only 16% said they had made no such additional provision.
Adding to the distress, 74% of respondents said their company’s operating expenses had risen during that time.
Somewhat more surprising, according to Creditsafe, was that companies don’t seem to be placing a high priority on reducing debt, despite the boost in bad debt reserves. In fact, just 5% of the respondents said paying debt was the most important aspect of growing their business.
“Since a large portion of businesses have seen both their operating expenses and debt increase, we would have expected to see reducing debt and preserving cash flow given higher levels of importance,” said Creditsafe in its research report.
Get cash faster, pay it slower
One way to mitigate a heavy debt load is by improving working capital, such as through efforts to reduce days sales outstanding (DSO) by getting more customers to pay on time.
Creditsafe sells credit-risk software, so it’s not an unbiased observer. That said, only 14% of those polled said at least 76% of their invoices are paid on time.
Of course, economic turmoil is one reason customers pay late, as they may be having their own cash flow issues or are allocating cash to boost their own bad debt reserves, the report noted.
According to Creditsafe, trying to control DSO by focusing mostly on customers’ credit scores and limits is insufficient in a business context. “Unlike consumer credit reports, business credit reports have a wealth of insights into companies’ payment behaviors,” the report said.
Companies are playing on both sides of the fence, though. Just as companies try to shore up their DSO, they also may favor putting brakes on their own time-to-payment, as measured by another metric, days payable outstanding (DPO).
“To free up cash, couple a high DSO with a lower DSO,” Perry Wiggins, CFO of nonprofit benchmarking organization APQC, recently wrote in the CFO Metric of the Month column. “In other words, for a stronger liquidity position, got money from customers quickly and pay suppliers and vendors slowly.”
Be aware, though, that vendors are more likely to do favors for customers who pay quickly, Wiggins wrote. “In a tight supply chain, prioritizing strategic supplier relationships makes sense.”
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https://www.cfo.com/news/58-of-businesses-say-their-long-term-debt-has-increased-in-the-last-year-costs-dso/715964/