According to a report by Janus Henderson Investors, “Companies worldwide took on a record US$456 billion of net new debt in 2022-2023. This pushed outstanding net debt up by 6.2% on a constant-currency basis to $7.80 trillion. And a report by S&P Global found that corporate debt defaults increased by 80% in 2023 and could be a problem again in 2024.”

As we progress towards the end of the second quarter of 2024, the strain of rising debt on US companies has become apparent.

In April, fashion retailer Express Inc. filed for Chapter 11 bankruptcy in the US. In March, US home fitness company BowFlex filed for bankruptcy. Express reported nearly $1.2 billion in total debts, while BowFlex had $126 million in liabilities when it entered bankruptcy, as per Creditsafe’s Perils of Rising Debt & DSO Research Study. Among other factors, the demise of these organizations was significantly influenced by debt and its effects on cash flow.

To explore the impact of escalating debt on US companies, Creditsafe surveyed 200 finance, accounting and auditing professionals in the United States to understand “How they manage debt, the most common causes of cash flow problems and the impact of rising debt and poor financial management practices on the bottom line.”

Conducted in April 2024, the survey covered companies across all industries that had more than 250 employees. Here are the key highlights from the survey report:

US companies accumulate more debt, struggle with repayment

Given the challenging economic landscape marked by rising inflation, high interest rates, and decline in consumer spending, it came as a little surprise that over half (58%) of US businesses witnessed an increase in their long-term debt levels over the last 12 months.

Adding to the financial strain, an overwhelming majority (74%) of businesses have experienced an upward trajectory in their operating expenses over the past year.

Despite the challenges posed by increasing debt and operating expenses, a mere 5% of businesses cited reducing debt as the most crucial aspect for fostering business growth. Conversely, more than half (52%) identified the acquisition of new customers and driving revenue growth as their paramount priorities.

Recently, the Associated Press (AP) News reported that the number of US companies going bankrupt hit a 14-year high. Furthermore, with US companies grappling with surging debt levels, the challenges associated with dept repayment are intensifying.

Creditsafe’s research study findings suggest that US companies appear to have developed a plan to navigate their way out of the spiralling debt situation. This is evidenced by 68% of businesses augmenting their bad debt reserves by as much as 30% over the past year.

Missed payments from customers are becoming a growing concern for American enterprises.

Timely payments from customers enhance organizational liquidity and cash flow, decrease an organization’s dependence on short-term financing or lines of credit (reducing interest expenses), mitigate credit risk, and strengthen stakeholder confidence, which is particularly important during times of economic uncertainty.

Unfortunately, Creditsafe’s report reveals that the problem of missed customer payments is escalating for American enterprises.

Alarmingly, just 14% of businesses stated that the majority (76-100%) of their invoices are settled on time. Moreover, 39% of businesses reported customers paying invoices 1-30 days past payment terms in the last 12 months. Additionally, 46% of businesses experienced delays of 31-60 days past payment terms, while 15% experienced customers paying their invoices 61-90 days past payment terms over the last year, the report noted.

 

Source: Creditsafe Perils of Rising Debt & DSO Research Study

According to the research study, there are various reasons why customers might be delaying invoice payments. Notably, 35% of US businesses attributed late payments to their customers encountering cash flow problems caused by a substantial drop in sales in the past year.

Invoicing errors and product dissatisfaction are also contributing to a higher incidence of missed customer payments, observed the Creditsafe report.

“What’s interesting is that 37% of businesses said missing PO numbers and incorrect billing information on invoices caused them to pay late. These seem like simple things, but it’s not that uncommon to see these types of invoicing issues arise”, the report mentioned.

The norm of missed customer payments driving finance teams to prioritise days sales outstanding (DSO) as KPI

Based on the report, “DSO refers to the average number of days it takes to collect payment for a sale. It can tell you so much about your customers’ financial health and their ability to pay bills on time.”

Over the past 12 months, 57% of businesses have seen their DSO grow, according to the research study, signifying an uptick in late invoice payments from customers.

The Creditsafe report reveals the primary reasons for the rising DSO among many companies. One factor is that 64% of US enterprises offer trade credit to up to 30% of their customers. In addition, 75% of businesses have seen their annual revenue grow in the past year. The combination of these factors likely explains the increase in DSO for more than half of the surveyed companies.

In conclusion, ensuring sound financial health for your organization is far from easy, yet it is crucial to stay afloat and thrive. From annual budget planning and accurate cash flow forecasting to prudent corporate debt management and efficient accounts receivable management, the responsibilities are vast.  

Effective debt management plays a pivotal role in maintaining financial stability and sustainable business growth, especially in light of the US Federal Reserve’s (Fed) stance on higher-for-longer interest rates, and corporate America carrying a $13.7 trillion debt load, as per the Fed.

In this context, US companies would be wise to consider a key takeaway from the Creditsafe research study, which emphasises that they “Can’t let revenue and profitability be the only thing they think about to grow their business. Trade credit, debt, increased operating costs, decreasing net income are just as important to monitor and manage as revenue.”