How do you know if your economy is in a rough spot? Take a look at the financial metric Days Sales Outstanding or DSO as it is commonly called. Days Sales Outstanding refers to the number of days it takes a company to pay after they have received an invoice. And wouldn’t you know, it’s on the rise. According to this recent Economist article, DSO has increased in America from 39.7 days in 2006 to 41 in 2007 based on a recent survey of large companies here. What is disconcerting is that the index rarely fluctuates by more than half a day in any given year. So this jump appears significant.
But is it stagnant sales that cause firms to hold onto cash rather than pay suppliers or lack of credit as the Economist suggests which exacerbates the problem? We’re hearing it’s a bit of both. With demand down in most major metals categories, DSO may continue to rise. Companies who have seen their customers stretch out payments may find themselves in a delicate position…risk upsetting the customer or falling short of their own cash requirements. Perhaps some careful negotiation of payment terms on the front end by requiring pre-payments, partial delivery payments etc can mitigate the non-payment risk on the back end. Otherwise, it looks like the ones doing well will be those 3rd party collection agencies.