The timely payment of income from our employers keeps us going; it helps to pay for our day-to-day expenses – the mortgage, electricity, water, phone bill, loans and groceries.
Now, imagine if this regular income became irregular? And instead of the timely boost to your bank balance, your employer withheld this money for two or three months, because it suits them better.
While this scenario is unlikely for most permanent Australian employees (or at least not without legal consequences for the employer) – it’s a problem that small to medium-sized enterprises (SMEs) face every day. According to a report by Xero and Alphabeta, smaller operators are losing $7 billion in stimulus each year through late payments. This has a significant impact on the wider economy with up to $2.54 billion in flow-on benefits being lost.
Big businesses are milking invoice time-frames from SMEs, because they can. Having a supply chain consisting of SMEs can mean a cheap and easy source of capital simply by slow-paying their invoices. A smart strategy for the big guy, but not so good for the SMEs who rely on this cash to fund operations, investment and growth.
Sadly, it's commonly perceived by smaller businesses that they are fortunate to be selling to the these big buyers and a late payment is better than no sale. This view is backed up by Illion Chief Executive, Simon Bligh, in the Sydney Morning Herald who says, "A small business is a taker of terms. They don't decide how fast they get paid, they get told."
The problem with long-term payments
For decades, Australian SMEs have dealt with late payments. Often, there’s a clear imbalance of power between large buyers compared to that of smaller suppliers – take Australian dairy farmers for example. Major retailers have been pressuring dairy farmers on the price of milk for almost a decade, crushing their profitability. As well as squeezing suppliers on prices, dragging their feet on paying invoices is another way for the powerful buyers to benefit as it’s a low-cost way to fund their working capital. Otherwise, buyers would need to fund their working capital by using debt or equity, and these investors are definitely not willing to provide capital for free.
As we have talked about recently, cash flow is the lifeblood of all businesses and not receiving payments on a timely basis can suffocate a business. Managing the predictability and regularity of that cash flow can be an ongoing and critically important struggle. According to the Australian Securities and Investment Commission, 40 per cent of businesses have inadequate cash flow causing them to fail in their early years, and 57 per cent of businesses are forced to borrow money to fund their working capital needs.
As we’ve discussed previously in our best practice accounts receivable blog, there are a range of strategies that can help to have invoices paid on a timely basis. Even if businesses apply ‘gold standard’ receivables management processes, it’s critical that cash flow is managed effectively and contingencies are in place – so a cash flow shock, like a large supplier paying you much later than expected, is a mere stumble, not a business ending blow.
A worldwide issue
In a case study by The New York Times, the extended payment culture has its origins in cunning business strategy. Large companies were asking for up to 120 days to pay their suppliers as a means to maximise their available capital and hold onto cash for internal projects. In New Zealand, even Fonterra the dairy co-operative, has been known to take 60 - 90 days to pay its supplier’s invoices, passing the treatment they get from their customers down the supply chain.
Is there relief for SMEs?
There is some hope that businesses will commit to faster payment times thanks to the Australian Supplier Payment code, released by the Business Council of Australia. Business Council chief executive, Jennifer Westacott, says, “The launch of the Australian Supplier Payment Code begins a new age of cooperation and mutual respect between businesses big and small.”
It’s predicted that this faster payment commitment will help the economy as a whole with trade between businesses in Australia valued at around $520 billion annually.
Although this commitment is a step in the right direction, SMEs are yet to see the promised benefits from the initiative and are waiting to see the proof in the proverbial cash pudding.
Skippr provides businesses with invoice finance and debtor finance using flexible line of credit that unlocks cash from unpaid invoices. If your business cash flow is suffocating from slow-paying customers, our invoice financing options can help you to breathe again. Please contact us for help.