Overview of payment practices
Late payment in the Hong Kong consumer durables industry affects nearly half of the B2B sales value
On average 48% of the total value of invoices issued to Hong Kong B2B customers in the consumer durables industry is overdue. This is in line with the territory’s average. 6% of the value of invoices remains unpaid 90 days past the due date (territory’s average: 7%), and 1% of the total value of B2B invoices is written off as uncollectable (again, this is in line with the overall HK’s average). Most of the survey’s respondents in the Hong Kong consumer durables sector say B2B customers delay payments as they use outstanding invoices as a form of financing, while 55% pay late due to inefficiencies of their internal payment process.
Based on survey findings, 41% of respondents in the industry reported Days Sales Outstanding (DSO) up to 30 days, 53% up to 90 days, and 6% of 90 days or more, resulting into a 57-day average (HK’s average: 61 days). Although this is slightly better than the average in HK, this points to a relatively poor success rate in collecting receivables of high value, which deprives the business of funds that could be invested in its operations.
3 in 5 respondents in the industry manage customer credit risk through self-insurance
Consistent with the averages for the country (61%), most Hong Kong respondents in the consumer durables industry retain and manage customer credit risk internally (self-insurance) or use trade credit insurance. 58% of industry respondents reported they ask for guarantees of payment from their B2B customers.
In order to remain financially sound and avoid liquidity constraints caused by customer payment defaults, many respondents from the industry (38%) said they needed to delay payment of invoices to their own suppliers. 33% reported they had to request a bank overdraft extension, while 30% had to increase time spent, resources and costs to chase overdue invoices.
Risk of payment default expected to deteriorate over the coming months
Significantly more respondents from the Hong Kong consumer durables industry (43%) expect customer credit risk to worsen than to improve (9%) over the coming 12 months.
Most of the respondents expect this to lengthen their DSO and, ultimately, to have a negative impact on cash flow and the investment capacity of their businesses. To mitigate the risk of incurring liquidity shortages caused by payment default, respondents plan to ask for payment guarantees, or to sell on cash terms, substantially more often. 27% plan to offer discounts for early payment of invoices, while 23% plan to start using credit insurance over the coming months.
For 65% of respondents, dependence on bank finance will increase over the coming months due to the increased indebtedness of the industry. However, half of the respondents in the industry expect banks to provide more credit to businesses over the same period. When asked their opinion on the outlook for the consumer durables industry in Hong Kong, 58% of respondents said that they are confident that it will improve, while still a sizeable percentage (33%) anticipate a deterioration.
ICT / electronics
Majority in the Hong Kong ICT/electronics industry experience payment delays due to customers’ internal ineffiencies
For more than half of the respondents, B2B customers in Hong Kong’s ICT/electronics industry delay payments because their internal payment system is inefficient. As the survey findings reveal, an average of 44% of the total value of the invoices issued by respondents to their B2B customers is overdue (HK’s average: 48%). Long overdue receivables (more than 90 days overdue) average 6% of the total value of overdue payments (HK’s average: 7%), while less than 1% of overdue receivables was written off as uncollectable.
Based on survey findings, 25% of respondents in the industry reported Days Sales Outstanding (DSO) up to 30 days, 68% up to 90 days, and 7% of 90 days or more, resulting into a 63-day average (country average: 61 days). This DSO figure points to a relatively poor success rate in collecting receivables of high value, negatively affecting businesses’ working capital and liquidity position.
Industry’s most often used credit management techniques: self-insurance and credit insurance
To mitigate the risk of payment default and improve cash flow, respondents from the Hong Kong ICT/electronics industry most often retain and manage customer credit risk internally (65%) or use trade credit insurance (61%). 53% of respondents request guarantees of payment.
Additionally, to avoid liquidity constraints caused by customer payment defaults and strengthen their credit control systems, 31% of the ICT/electronics industry respondents (country average: 33%) said they needed to increase time, costs and resources to chase overdue payments.
Upswing in write-offs of uncollectable receivables expected
More respondents in the Hong Kong ICT/electronics industry (33%) expect customer credit risk to worsen than expect it to improve (20%) in the near term. 47% do not expect any change. Of note, the deterioration in B2B customers’ payment practices is expected to cause write-offs of uncollectable receivables to rise, further weighing on businesses’ cash flow.
However, customer credit management in the industry will see an increased use of payment guarantees, as well as sales on a cash basis, over the next 12 months.
According to 57% of the Hong Kong respondents, indebtedness of the industry will increase over the same period and with that, businesses will become more dependent on bank finance. This latter is expected to further increase support for the industry (as stated by 50% of respondents). When asked about the outlook for the ICT/electronics industry, 49% of Hong Kong respondents believe that business performance (sales and profits) will improve over the next 12 months.
Hong Kong’s textiles industry experiences far more late payments than country average
Survey findings show that, on average, 60% of the total value of the B2B invoices issued by Hong Kong respondents in the textile industry remains outstanding at the due date (far more than the country average of 48%). Long-overdue receivables (more than 90 days overdue) average 11% of the total value of overdue invoices (country average: 7%). 50% of the survey respondents state their B2B customers delay payments most often as a form of financing. Based on survey findings, 31% of respondents in the industry reported Days Sales Outstanding (DSO) up to 30 days, 56% up to 90 days, and 13% of 90 days or more, resulting into a 61-day average (in line with the country average).
As stated earlier in this report, DSO figure points to a relatively poor success rate in collecting receivables of high value, negatively affecting businesses’ working capital and liquidity position. This finding tallies with the finding highlighting the proportion of receivables written off as uncollectable averages 3%, namely three times higher than the country average.
Rise in the costs, time and resources needed to chase late payments
To minimise the impact of poor cash flow, 33% of respondents increased their costs, time and resources to chase late payments.
30% reported that they needed to strengthen their internal credit control procedures, while an almost equal percentage reported that they needed to delay payments to their own suppliers, or requested a bank overdraft extension.
Dependence of industry on bank finance expected to grow in the near term
Four times as many respondents in the Hong Kong textile industry (39%) expect customer credit risk to deteriorate than expect it to improve (9%) in the near term. 51% do not expect any change. Most respondents do not plan to change their mix of credit management techniques, which prioritises the use of letters of credit (78% of respondents) and of guarantees of payment (75%).
However, 1 in 4 respondents foresee an increasing use of trade credit insurance, and more frequent use of securitisation. For 45% of respondents, cash flow constraints for many businesses in the Hong Kong textile industry will cause dependence on bank finance to increase. 28% of Hong Kong respondents believe that business performance of the textile industry (sales and profits) will improve over the next 12 months (55% expressed the opinion that it will remain the same).