A report released in March 2019 by the Ombudsmen for Small Business and Family Enterprises, sought to investigate the payment terms, times and practices in the Australian market. In particular, it sought to understand the current state of late invoice payments by big business to small business. The report was a follow up to the Payment Times Inquiry in 2017. It provided advice to Senator the Hon Michaelia Cash, Minister for Small and Family Business, Skills and Vocational Education.

In 2017 the Payment Times Inquiry found that:

• 1 in 2 respondents reported that more than 40% of their invoices were paid late

• 1 in 5 respondents reported that invoices took more than 60 days to pay

• 1 in 2 businesses had more than $20K owing to them

• 57% had to borrow or use credit cards to fund the shortfall

In response to the 2017 report, a number of initiatives where introduced including:

• Launching the BCA Australian Supplier Payment Code in April 2017. This is a voluntary opt-in code introduced by the Business Council of Australia (BCA.) It encourages self- regulation. The code is designed to encourage small business supplier invoices to be paid within a 30 day time frame.

• The Government set about targeting a 20 day payment term for goods and services provided to them by small business.

The ombudsman hosted a survey of more than 2,400 small and family businesses. It asked them about actual payment terms and whether and how often they were being met. 

It found that:

•  Late payments were the key cash flow issue for small business and family enterprises

• Late payments are being used as a form of finance by big business. They were using these funds as working capital at the expense of their suppliers

• 1 in 2 respondents said that 40% of their invoices were paid late in 2018

• 28% of respondents said that 60% of their invoices were paid late in 2018

The report was also based on discussions with big business. Over 250 letters were sent seeking confirmation about their payment terms to small business. They also asked them whether these payment terms were being monitored or met. Some large businesses declined to make their payment terms public. They cited concerns about the potential impact on competition as the reason for this.

The ombudsman was not convinced that where small business payment terms existed, systems existed to report compliance with these.

In the course of the research, many small businesses reported that they had to follow up a minimum of 2 times to get an invoice paid. Some large Australian businesses investigated had payment terms of 45 or 60 days after invoice. In a couple of instances it was 90 days! You can see the full report and list of businesses surveyed at the end of our article.

What is the Impact on Small Business of Late Payments?

Managing cash flow is an enormous pain point for small business with tardy customers. The issues that arise are many.

• Creates issues relating to solvency

• Is a drain on resources

• Has a negative impact on mental health due to stress

• Reduces the ability of small business to capitalize on opportunities

• Has a negative impact on jobs growth in the SME sector

• Can lead to a struggle to meet tax obligations

How can this Power Imbalance be Improved?

The report makes a number of recommendations, including:

1. Introduction of an Independent annual reporting framework

Where businesses over 100m turnover would report to ASBFEO and publish their payment practices.

2. A review of Supply Chain Finance Option

This involves the ombudsman reviewing finance strategies offered by large businesses.

3. Review small business supplier terms and conditions under the unfair contract terms legislation

4. Investigate e-invoicing and technology solutions to improve invoice processing

This should reduce the cost involved to process an invoice and the time that it takes.

5. Government industry codes to state payment terms

The Ombudsman suggests the introduction of mandatory Government industry codes. This would regulate business-to-business transactions by including minimum small business supplier payment terms.

6. The introduction of systems to recognise a supplier as a small business including a small business register.

7. Introduction of deemed trust accounts in the construction sector

The government could mandate the use of deemed trust accounts via the Australian Building and Construction Building Code. Their suggestion is that this should apply to all public works and construction projects.

Who Pays?

Whilst many of the recommended changes make sense, part of the ongoing issue relates to incentive. It is vital to give big business and Government agencies an incentive to report, identify and monitor their invoice payment times to small business. This presents a cost conundrum. Big business is unlikely to want to wear the cost of introducing systems that serve to help make sure they pay the little guy on time!

The report found that in some instances small business payment code of practices existed. They were not widely known or followed.

The imbalance of power between small business suppliers and big business customers needs to be improved in Australia.

Efficient payment times, terms and practices are a work in progress for Australian business. For the upwards of 2 million small businesses in Australia, the cash flow headaches are part of doing business. Our invoice finance solution for SME’s continues to be the simple answer to getting your unpaid invoices paid efficiently and at a sensible cost.

Invoice Money is the Invoice Finance provider of choice for SME’s. Get in touch with our friendly team to discuss your requirements. You can contact our team in Melbourne or Sydney here.

 Source: The Australian Small Business and Family Enterprise Ombudsman

Full report available here. https://www.asbfeo.gov.au/sites/default/files/documents/ASBFEO-payment-times-report-2019.pdf