My last post covered payment terms. This one covers the closely related issue of late payments. Approximately 50% of all businesses experience late payments, according to mysterious internet sources. As with payment terms, there is very little hard data on payment practices in different industries. This information is buried in ERPs, AP, and AR systems.
D&B Data on Late Payments
The “best” data I have seen on late payments by industry is a quarterly report published by Dun & Bradstreet and the Credit Research Foundation, entitled “Accounts Receivable and Days Sales Outstanding Industry Report“. D&B says it’s:
aging A/R data is supplied by participants in the Global Trade Exchange Program, its commercial trade data network, and aggregated by the industry of Global Trade Exchange Program participants. Participants report their trade payment information to help strengthen reporting of trade credit experiences.
I put “best” in quotes above because I’ve been using D&B data since the ’90s, and let’s just say I’ve experienced challenges. In this case, the report is based on overlapping SIC codes at the 2- and 4-digit levels, rather than the more modern NAICS system. In addition, the report includes some non-sensical data such as a negative percentage of customers paying current and an offsetting 145% paying late (see below):
Alas, this is the best data I have. (An all too familiar refrain for D&B customers.)
Four Industry Archetypes for Late Payments
Despite data limitations, D&B’s report provides payment practices experienced by suppliers in 211 SIC codes. The industries cluster into four types.
- Industries with great payors. There are some industries where payors are rarely late. Agricultural crops are perishable and their payment terms are regulated, so no late payments there. Most chemical industries, paper mills, and oil refiners are paid on time, which I ascribe to industry concentration. The same is true for many types of machinery and for semiconductor manufacturers. Industries that sell largely via credit card also avoid late payment problems (though they pay credit card fees to do so). As a result, air transport and tour operators have few late payors. For some unknown reason, customers of wholesale sporting and recreational goods suppliers are also punctual payors.
- Industries with reliably late, but not too late, payors. A couple of industries seem to have buyers who pay late and yet reliably so. According to D&B, petroleum bulk stations are paid late almost 50% of the time, but almost always within 30 days. Prefabricated metal building suppliers are paid late 20%+ of the time, but also almost always within 30 days. I can’t explain this pattern.
- “Normal” industries have payors that pay on time 80% or more of the time, a bunch of payors who pay up to 30 days late, and then a long tail of payors who pay 30-60 days, 60-90, or 90+ days late. This is what one might expect from normal human behavior, mild disappointment.
- The “deadbeat” industries. In these industries, late payments are almost the norm. They appear to be a feature, not a bug! I’m most interested in these deadbeat industries.
The Deadbeat Industries
In the chart below, I’ve tried to dimensionalize the late payments problem in the top “deadbeat” industries. On the Y-axis is the percentage of payments that are 91+ days late–that’s very late. On the X-axis are the percentage of payments that are current. As a result, the closer an industry is to the top left of the diagram the worse the industry performs on payment punctuality.
The size of each circle represents the relative sales of each industry, so you can see how much relative money is involved. (Please take this data with a grain of salt. It was hard to join census data collected by NAICS code with D&B data classified by SIC code. And SIC coding stinks.)
As you can see, there are a few industries where 30%+ of payments are late. And in a few of these, more than 15% of payments are 90+ days late.
- Commercial construction payors are late almost half the time and often more than 90 days late. No one who interacts with that industry is surprised. This creates opportunities for Procore, Built, Nexus Systems (now Paymode), Oracle which bought Textura, and more.
- Repair services stand out as well. This creates an opportunity for Service Titan and Housecall Pro, among others.
- From the folks at FastPay (bought by AvidXChange), I knew payment practices were tough in web publishing (which is what miscellaneous publishing is). Web publishers collect from media buyers who collect from clients.
- Implantable medical devices (“bill only” healthcare-lingo) are a big category being addressed by providers such as GHX, Casechek, Surgery Exchange, ReadySet Surgical, and Kermit PPI.
- Equipment lease and rental equipment late payments do not surprise me, after all, if you are leasing your equipment, you are keen to manage your cash flow!
- I can’t explain wholesale professional equipment, the retail businesses listed, telephone communications, and certainly not wholesale packaged frozen food.
If you, dear readers, have any idea why these other industries have such late payments, please let me know.
One of my favorite Warren Buffet quotes is:
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
It turns out that the same may be true for collections. Some industries just seem to have terrible payment practices. I’d also note that many of Warren Buffet’s businesses are quick to collect and slow to pay (e.g., insurance). BNSF, his railroad extends credit for 7-15 days in most cases and it’s standard payment terms are 30 days. That’s a recipe for generating cash Mr. Buffet can invest!