An Underrated Metric in the Supply Chain: DBT

DBT refers to the number of days past payment terms that a company pays its suppliers. It provides a clear picture of how reliable a company is and how long it will take to pay invoices.

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Anyone who works in supply chain is no stranger to acronyms. 3PL (Third-Party Logistics). CIF (Cost, Insurance and Freight). COGS (Costs of Goods Sold). LTL (Less Than Truckload). The list goes on and on.

When you think about optimizing the supply chain, most companies think about inventory management, logistics and operating costs. Of course, these matter. But there’s another acronym that doesn’t get as much attention as it should – DBT (Days Beyond Terms).

What is DBT?

DBT refers to the number of days past payment terms that a company pays its suppliers. It provides a clear picture of how reliable a company is and how long it will take to pay invoices.

Whether you’re a supplier hoping to produce goods for a manufacturing company, or vice versa, you need to look at the DBT of the company you want to work with. Why? Because you need to see through hard data how well (or poorly) they pay their bills. Essentially, the lower a company’s DBT is, the more reliable they are as a payer.

Let’s say a retailer has hired a supplier to manufacture their apparel. For that supplier, being paid on time could make or break their ability to continue doing business and to complete production orders for that customer (and other customers). The longer it takes for a customer to pay, the more strain is put on the supplier’s cash flow. Late payments have a domino effect.

How DBT Can Be a Strong Indicator of Cash Flow Issues

To get the full picture, you need to look at how the company’s DBT fluctuates over a 12-month period. As you look at DBT trends for a company, there are several red flags you’ll want to look out for. For example, if a company had a relatively stable DBT (hovering between 6 and 8) for a few months but then its DBT spiked to 50 in a single month and then continued to rise for the next six months, this would indicate something has changed with their finances and they’re taking longer to pay their suppliers.

When Red Lobster filed for bankruptcy on May 21, 2024, it was facing multiple financial challenges. The restaurant chain reported that it lost an estimated $12.5 million in operating revenue in the fourth quarter of 2023. Plus, the company’s “Endless Shrimp” promotion backfired and resulted in major losses.

This is a prime example of how DBT can be a strong indicator of cash flow issues. When we looked at the company’s DBT over the 12-month period leading up to the bankruptcy filing, we could see that the company’s DBT was 15 in December 2023 – meaning it typically paid suppliers 15 days late (beyond payment terms). But after that, its DBT spiked drastically – jumping to 26 in January 2024 and then nearly doubling to 47 in February 2024. As of March 2024, its DBT was 48. So, that means Red Lobster’s suppliers would often be waiting upwards of two months past their payment due date to get paid. If they had Net 60 or Net 90 payment terms, it could have been well over four months before they saw their first invoice paid by Red Lobster. It was also worrying that the company’s DBT had been so volatile and spiked drastically multiple times. This shows the company may not have done the necessary cash flow forecasting to protect itself from potential losses, revenue declines and challenging market conditions. It probably didn’t help that Thai Union Group decided to exit from its investment in Red Lobster.

Why DBT is Often Overlooked in the Supply Chain

Let’s talk about why it’s such an underrated financial metric and can be overlooked by other supply chain metrics.

One key reason is that many companies don’t know that business credit reports exist. But more than that, many don’t understand how different business credit reports are from consumer credit reports. With consumer credit reports, credit score and credit limit are usually the two data points that everyone cares about. While these are both available in business credit reports, they aren’t the only data points that matter.

When assessing the financial health of a customer or supplier, you should analyze the DBT data in parallel with other relevant information, including:

  • DBT Trends: Analyze how the DBT fluctuates over a 12-month period. If the DBT suddenly spikes in a short period of time, that could show something is amiss internally. And if you can see a pattern where the DBT consistently increases over multiple months, that could be a red flag of cash flow issues.
  • Total Late Payments: Look at the trade payment data to see how much of the company’s outstanding bills are current and how much are past due (1-30 days, 31-60 days, 61-90 days and 91+ days). Pay attention to patterns. If, for example, a company only paid about 2% of its bills 91+ days late in a certain month but then paid roughly 45% of its bills 91+ days late the following month, that could be a sign of cash flow issues.
  • Legal Filings: When we talk about legal filings, we’re referring to lawsuits, tax liens and UCC filings. As our State of Credit Risk 2022 report found, there were over 2.7 million legal filings against American businesses in 2022. What’s more concerning is that these legal filings drained companies of over $54 billion. That’s why it’s important to look at how many total legal filings a company has filed against them and the associated costs.
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