Poor cash flow is the primary reason for business insolvency in Australia”
– Kate Carnell, Australian Small Business and Family Enterprises Ombudsman
The Australian Small Business and Family Enterprises Ombudsman (ASBFEO) has released a report of large business payment terms, with the aim of measuring the impact of delayed payments on small business.
Large businesses across a wide range of industries were asked to contribute their current payment terms with smaller suppliers. A survey was also sent out to small business, with the majority of respondents citing late payments as a key issue. The problem is further amplified by the imbalance of power in the relationship, forcing smaller suppliers to accept extended terms (greater than 30 days), with payment still regularly being late – a precarious position indeed for an SME supplier.
The report published on 8 April 2019 identifies a persistent trend in Australia of payment times being extended well beyond industry standards. Available to read here, the report examines payment trends among many of Australia’s large and multi-national businesses as well as providing recommendations on how practices could be improved to protect small business cash flow.
Some key findings from the report.
In the last financial year, all respondents reported late payments on their invoice’s, with around one in two reporting greater than 40% of their invoices were paid late, and 28% of the respondents reporting that 60% of their invoices were paid late.
Payment terms by industry sector
Construction, mining, retail, state government, manufacturing and large multi-sectorial businesses were identified by more respondents as having payment terms in excess of 30 days – with some payments pushing out well beyond.
The impact on small business.
The report refers to data from the Prushka report, showing half (45%) of small and medium businesses reported they have more than ten outstanding invoices per month, and they need to pursue invoices more than twice before payment is received (asking 2–4 times per outstanding invoice is common practice). This represents a further burden to already time poor SME’s and has numerous knock-on effects for their business.
When large businesses delay payment to their smaller suppliers, the cash flow and revenue of the small business will be impacted. This kind of cash flow stress placed on small businesses may have ramifications around solvency; the business may also be unable to meet tax obligations or take advantage of opportunities for growth.
Managing the shortfall.
With late payments continuing to impact small business, combined with the challenges to accessing finance post the Royal Commission into Financial Services, we are seeing a real squeeze being felt across the SME sector.
Small businesses increasingly need to seek out additional support to fund the shortfall left by unpaid invoices. Planned for and managed though, using a facility such as Apricity invoice finance, can help SME’s create a plan to navigate the unpredictability of fluctuating cash flow.
One of the key points of the report is the hesitancy of many large corporations to be transparent about their payment terms, and how often they meet them. According to larger corporates they fear disclosing the information will make them less competitive (this is of course at the expense of smaller suppliers). The Ombudsman states also that it highlights the ‘critical need’ for a national payment register compelling all businesses to disclose their terms and ensure a fairer environment for SME’s to operate.
The report makes seven recommendations in total including; annual reporting framework, business register, review of supplier terms and conditions, mandatory government codes, impact of supply chain financing, technology solutions and statutory trusts.
The report and recommendations can be viewed in full here.