A cardinal sin we see a lot of businesses commit is that they don’t look deep enough into the financial data that makes a difference to their cash flow and profitability. One of these performance metrics is Days Beyond Terms (DBT). It’s rarely understood in the wider context of business longevity and stability.
Why? For a start, companies are more often focused on data like credit scores and credit limits. Perhaps this data feels ‘safer’ in the sense that some companies would prefer not to do the legwork needed to investigate the overall financial health of their customers and suppliers. Perhaps because credit scores and credit limits are simple to understand in the sense that they appear to be a concrete benchmark of whether an organization is financially stable or not. At least on the surface anyway.
Another reason may be due to the term being complicated by unnecessary jargon like PAYDEX, Payment Index and CPR score. Or complex methodology that could come from a place of wanting to help, but actually does more harm than good.
Of course, DBT isn’t the only financial health metric to pay attention to. There are other key data points like legal filings and sanction associations to be aware of before getting into bed with a new customer or supplier. But DBT is one of the most predictive data points you can use, as it provides unique insight into a company’s ability and willingness to pay bills.
Check the DBT of your customers and suppliers
Understanding the basics of DBT
As far as we’re concerned, DBT should be explained in the simplest way possible. It’s the average amount of days a company takes to pay suppliers. A high DBT score means that a company is taking more time to pay their bills (past payment terms), while a low DBT score means companies are paying closer to their payment terms. Seems easy enough to grasp, right?
The truth is that misunderstandings start to happen when businesses aren’t aware of what different DBT scores mean in relation to other factors. We’re talking about industry specifics like day-to-day operations and lead times, alongside the rest of the picture that needs to be painted by other financial data points. Because without understanding all these elements, you have an incomplete jigsaw puzzle. Without these missing pieces, you can’t do a proper business risk assessment. This means you leave yourself open to cash flow loss, reputational damage and worse.
With that in mind, we’ll address the most common questions we get asked about DBT, break down misconceptions and provide examples of what a healthy DBT and unhealthy DBT look like.
What is a good and bad DBT score?
We don’t like thinking about DBT in terms of ‘good’ and ‘bad’ scores. That’s a bit too simplistic. Don’t just pay attention to the average DBT score and try to label it as good or bad. This figure alone isn’t going to give you the best or most informed picture of a company’s willingness and ability to pay their bills. You need to analyze DBT in several ways.
Look at the historical payment data to see how a company’s DBT fluctuates over a 12-month period.
Compare the company’s DBT to the industry average and see if this has changed over a 12-month period.
We would much rather you look at the fluctuations of DBT than use a single DBT score as part of your analysis. Now, if you’re looking for some parameters of what a healthy or unhealthy DBT looks like, we can give you some broad examples. But again, it’s the fluctuations and comparisons to the industry average over a 12-month period that will give you the best picture of a company’s ability to pay its bills on time.
Healthy DBT: Somewhere between 1 and 15 days
Unhealthy DBT: Over 15 days
But again, we can’t emphasize this enough; these are just ranges. Let’s say a construction company has a DBT of 15 and has stayed around there for the last 12 months. If the industry average for that industry is typically high (over 25), then the company in question isn’t necessarily doing so bad when it comes to paying their bills. On the other hand, if the construction company’s DBT has been volatile and spiked in a single month from 15 to 45, that could indicate some pressure on its cash flow. But again, you would need to analyze this over an extended period to determine if it’s just an anomaly or if it’s indicative of financial trouble on the horizon.
Why are fluctuations in DBT problematic?
Has the DBT been stable and low for 12 months? Has the DBT been volatile and yo-yoed throughout the 12-month period? Have there been sudden spikes in DBT that happened in a short period of time and then stayed high for several months after that?
Look for these types of patterns and trends to better understand how your customers are managing their cash flow and how likely they are to pay your bills on time (or relatively close to it). That’s not the only DBT pattern you should be looking at when reviewing the business credit reports of your customers. You should also compare your customer’s DBT to the industry average DBT.
Steve Carpenter, Country Director of North America for Creditsafe, explains why fluctuations in DBT can be so indicative of liquidity problems. “A significant fluctuation in DBT is often the first sign that a company is having financial difficulty. A DBT of 10 means that, on average, a company pays its bills 10 days late. A DBT of 45 means that, on average, a company pays its bills 45 days late. Paying 10 days late is better than paying 45 days late. But in some industries like construction, companies are notoriously late payers. So, a consistent DBT of 45 days month-over-month may just be the norm for that industry. But if the DBT jumps from 10 to 20 or from 45 to 60, this means a company is now paying their bills slower than usual, which could be an indication of the first signs of financial stress. This is why it’s so important to monitor fluctuations in DBT.”
We recently launched our Financial & Bankruptcy Outlook: Transportation report where we analyzed 10 top U.S. transportation companies to understand which companies are faring well, which are showing early signs of financial trouble and which could be on the brink of financial failure. The report shows several examples of how fluctuations in DBT can provide significant insights into a company’s cash flow situation.
Take, for example, Avis Budget Group. According to Creditsafe data, Avis was doing a relatively good job of paying its bills close to payment terms at the start of 2023. Its DBT was 9 in February and 8 in March. But then it spiked drastically to 31 in April and stayed close to there for the next five months, reaching 29 in September. To put this into context, the industry average DBT was between 10 and 16 during this period. This is what we found in our recent Financial & Bankruptcy Outlook: Transportation report.
When a company’s DBT changes so drastically in a short period and then continues to rise after that, that’s an indication that something is amiss internally. It could be multiple factors at play – from declining revenue for several quarters and loss of customers over time to mounting debt and poor cash flow forecasting.
But then if you look at United Airlines, their DBT tells a different story. Although there were some fluctuations in the company’s DBT in the last 12 months, we could see that its DBT remained below the industry average DBT during that time.
Seeing how and when your customer’s DBT rises or drops and if that happens suddenly is far more useful than looking at a single DBT score. You want to understand how your customers are managing their cash flow and how they’re anticipating potential economic downturns, revenue declines, customer losses and other factors. If the proper cash flow forecasting hasn’t been done, signing a contract with a customer whose DBT is volatile and has been high for 12 months could be problematic for your own cash flow.
Why should you cross-reference DBT with a company’s financials
Just like with any analysis, you can’t use a single data point as the basis for making decisions. You need to collect, review and analyze various data points and find patterns and trends. Finding those patterns and trends will help you better understand the data so you can make more informed decisions. That’s why it’s so important to cross-reference DBT patterns with a company’s financials, including sales, revenue, debt, operating expenses and other relevant factors.
All this information is critical to making the right decision on whether to work with a potential customer or supplier. To help you do this, we’ve created a toolkit that will help you gather the right data points and make the most informed decisions that help your business grow long-term.
We’ll say this as many times as it takes to make an impact. Don’t use a single data point or source to make your decisions. As you’re reviewing how a company is paying its bills (i.e. if its DBT has spiked suddenly and drastically, what percentage of its bills are current vs. past due, if the total value of late payments has increased drastically), you should be reviewing the financials of your customers too.
There are a few ways you can do this. If the customer is a publicly traded company, you can review their quarterly and full year earnings reports. But if they’re a private company, this typically requires that you ask for at least two years of their financial statements.
Here are some of the data points you should be reviewing in a company’s financials:
Reported sales and year-over-year changes
Reported profitability and year-over-year changes
Reported net income and year-over-year changes
Reported debt and available cash
Reported operating expenses and year-over-year changes
Reported losses and year-over-year changes
These are just some of the data points you should be looking at in conjunction with a company’s payment behaviors. Together, they can paint a much clearer picture.
Analyze DBT in relation to long-term debt
Every business will incur debt at some point or another. And as a company grows and scales, adding more customers, it’s likely that it will need to secure financing and loans at some point in the future. But if a company’s debt continues to rise over several years, while other factors worsen (i.e. revenue declines, economic downturns, customers leave, etc.), it can signal potential financial challenges down the road.
Let’s go back to Avis Budget Group to show you what this could look like. The company’s earnings reports indicate that its long-term debt for the quarter ending September 30, 2023 was $23.389 billion, which was 32.39% increase year-over-year. And the year before (2022), its long-term debt was $18.453 billion – an increase of 19.98% from 2021. With its debt rising over the last few years, which is certain to have put more pressure on the company’s cash flow. This could account for why Avis’ DBT spiked from 8 in March 2023 to 31 in April and then stayed close to there until September 2023.
Analyze DBT in relation to sales and revenue
Another data point that’s important when you’re reviewing a company’s financials is their sales and revenue. Similar to what we said about looking for fluctuations in DBT, you should be analyzing a company’s sales and revenue in a similar way. Don’t just look at the current quarter – look at it over a 12-month period (at least).
Pay attention to certain patterns and trends. Has the company’s sales declined drastically in a recent quarter? Has their sales dropped consistently for the last four quarters? Have they been struggling to stay relevant against the competition and lost customers as a result? These patterns can be useful and telling when you look at them alongside their payment behaviors. If their sales has dropped significantly over certain quarters and their DBT spiked during the same periods, that could indicate their cash flow isn’t healthy and they’re struggling to keep up with their bills.
Analyze DBT in relation to operating expenses
As we’ve talked about looking at things like sales, revenue and debt, you should also look at a company’s operating expenses. Have their expenses risen over a 12-month or 24-month period? Have their expenses risen, while their revenue and profitability have declined during that same time? Look for patterns in other data and then look at how their DBT performed in relation to those time periods. Was their DBT high and above the industry average for the 12-month period when they reported losses, declines in revenue and profitability and increasing debt?
Best practices to protect your business from risks
As the Country Director of North America at Creditsafe, Steve Carpenter knows all too well how hard it can be for a company to fully protect itself from risks. But he strongly believes that if you build the right strategies and processes, while implementing the right technology and data, you can do it quite well.
Here are Steve’s suggestions:
- Monitor DBT via proactive monitoring updates daily.
- Benchmark the DBT of a company against the industry average DBT for all companies of a similar size in the same line of business.
- Look for data patterns and trends, such as a rise in DBT coinciding with one or more debt collection cases or lawsuits against the company. This would be a major red flag.
- Monitor the company’s credit score as the credit score is a derivative of all key data points within a credit report including DBT, legal fillings, collection cases, financials and company financials.
- Use media monitoring to identify any negative news or rumors of a potential bankruptcy filing in the near future.
- Credit circles are also a great source of data as speaking to your peers from other companies in your industry will flag up issues or concerns relating to a customer that may not be in the public domain.