Late Payment Escalates in IT Sector

Resellers bear brunt of customers’ late payment, as average Days Sales Outstanding soars to 152 days for smaller IT firms

Siemens Financial Services has analysed thousands of UK companies’ annual accounts and found that late payment to small firms in the IT sector – encompassing the majority of the country’s IT resellers – has escalated wildly over the last financial year. The study shows that the average Days Sales Outstanding (DSO) for IT firms with 10-49 employees has soared from 67 days in 2004 to a staggering 152 days in 2006. With late payment widely recognised as a major contributing factor to business failure in the channel, Siemens’ study highlights the urgent need for IT resellers to insulate themselves against late payment by offering customers leasing options at point-of-sale (as an alternative to cash purchase) as well as the evident opportunity to make greater use of receivables finance techniques (factoring & invoice discounting) to alleviate their cash-flow pressure.

In contrast, the study showed that medium-sized IT companies’ average DSO was 51 days in 2006, clearly indicating the striking contrast between small and large companies’ ability to keep invoice payment timings under control. By way of sector contrast, the research also confirmed that the telecoms sector remains far less vulnerable to the effects of late payment. Telecoms resellers with 10-49 employees have an average DSO of less than a third that of their IT counterparts (46 days compared to 152 days.)

Peter Austin, General Manager, Flow Business at Siemens Financial Services comments, “It is an unfortunate reality that late payment is often accepted as the norm in our business culture, and smaller companies are least able to shoulder the burden of late payment by their larger customers. But for the majority of IT resellers, the situation has reached breaking point – how can they sustain a healthy business when days sales outstanding, or debtor days, run at 150? With already paper thin margins, the channel can ill afford to bank-roll their customers in this way.

“One solution that can ease cash-flow pressure is to use receivables finance, where finance is raised against the reseller’s outstanding invoices to unlock immediate funds. But taking a longer-term view, smaller resellers should learn from their mid-size peers who are using point-of-sale finance. One of the many benefits of this approach is that the invoice for the product and service is sent to the finance firm, who pay immediately, effectively reducing debtor days to zero.

“The research also corroborates the widely held view that when faced with a stark choice, companies will pay for their telecoms equipment and services before IT , evidently because telecoms plays such a central role in today’s business environment.”