The traditional technique of stretching working capital by delaying payments to creditors presents reputational risks. Boards need to prioritise creating a responsible payment culture.
Late payments to small businesses from their larger business customers have long been one of the sharpest thorns in the side of small operators in Australia and internationally. As our nation works towards economic recovery from the COVID-19 pandemic, the impacts of late payments must be urgently addressed.
To give some perspective on this problem, a 2017 report by Plum Consulting found that nearly $50b is paid late to Australian SMEs every year, while the Scottish Pacific SME Growth Index report noted that late payments accounted for a 43 per cent downturn in small business cash flow.
The 2017 Payment Times and Practices Inquiry by the Australian Small Business and Family Enterprise Ombudsmen reported that Australian organisations lagged well behind their international counterparts, paying their suppliers on average 26 days after the due date — 20 days later than their peers in the US and UK.
In my experience, the problem is due to the imbalance of bargaining power; and in many cases is under-reported, as small business owners fear retribution through their removal from procurement panels.
Impact of late payments
Late payments expose businesses to increased financial risk. The UK Department for Business, Energy and Industrial Strategy found up to 30 per cent of SMEs needed to access bank overdrafts to cover cash flow shortfalls due to late payment. Most significantly, late payments are named as the single biggest cause of business failure for SMEs, which are often ill-equipped to manage payment delays due to their limited cash reserves.
The non-financial effects of late payments are also extensive. New research published by Barclays Bank showed that 39 per cent of SME owners say their mental wellbeing has suffered as a result of late payments. A further 25 per cent report reduced work-life balance due to inability to take leave, while others noted a worsening of personal relationships caused by stress and anxieties created by late payments.
Aside from the impact on individual businesses and their owners, late payments affect our overall economy. When SMEs experience cash flow constraints via consistent late payments, they are less able to innovate, expand and employ. In fact, as the UK experience found, it may even lead to redundancies.
What is the solution?
While the launch of the federal government’s Payment Times Reports Register late last year is designed to provide transparency around big to small business payment times, this public record targets organisations with an annual turnover above $100m. It therefore only reports on the payment policies of Australia’s biggest organisations. To effect real change, it is essential that all of Australia’s 2.4 million businesses embrace their obligation to pay business-to- business invoices within 30 days.
These four steps are something all businesses should do:
- Implement a formal and public policy to pay small businesses within 30 days or less from the date of correct invoice
- Cease the practice of requesting on-time payment discounts or using late payments to bolster their own working capital
- Implement measurement and reporting of their payment times in order to improve performance
- Adopt the digital tools available to expedite and streamline payment processing.
COVID-19 has accelerated digital adoption in many areas of life — and payments are no exception. The introduction of e-invoicing (the digital exchange of invoices between accounting systems rather than entities) is an important step towards streamlining and expediting payments between businesses. However, this is just the mechanism to pay invoices more efficiently.
What a difference it would make to small businesses — and our national economy — if we committed to an on-time payment policy such as those adopted by Australian governments.
Many jurisdictions have committed to 20- day payment terms — and five-day terms where e-invoicing capability exists. Often, late payments do not occur for legitimate or unavoidable commercial reasons. Rather, large businesses choose to use small businesses as involuntary creditors, by delaying payments. However, paying suppliers promptly, particularly small businesses, should be part of every organisation’s ESG standards.
It is, quite frankly, unethical — as well as unsustainable — to knowingly endanger the existence of smaller enterprises by stretching payment time frames so as to prop up your own financial position. It is the type of behaviour that not only threatens the reputation of corporations, but also that of their boards.
I urge corporate Australia to demonstrate that we don’t need further regulation in order to do the right thing for our small business sector and our economy. Australia can lead the world in creating a responsible payment culture — and consequently remove a significant drag on the nation’s economic future.
The Payment Times Reporting Regulator’s second report, released in 2022, looked at the payment policies of 7000 businesses with an annual turnover of more than $100m.
47% of big businesses paid more than 80% of their suppliers by their agreed payment deadline
36.2 days average contract terms for payment (down from 36.6)
31% of big businesses paid more than 80% of small business invoices within 30 days
11 days shortest average
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