Late payment causing major strain

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A survey of more than 500 Australian small business owners  and managers found nearly four in five (79%) of those polled support a government-backed policy to shorten the time it takes big businesses to pay small businesses. Late payments can cause major strain on small businesses, who are unable to hire more people, purchase more equipment or grow faster when there is a cash flow gap.

And the majority of small business managers surveyed said they want to see the government encourage a fairer system for small businesses to compete with big businesses for contracts (84%), and level the playing field with big businesses (70%).

The findings provide the strongest support to date for a payments code aimed at solving the cash flow gap between big and small businesses in Australia, ahead of an anticipated report into the payment times by the Australian Small Business and Family Enterprise Ombudsman. While the vast majority of small businesses have payment terms of 30 days or less for their suppliers, many big businesses mandate terms of 60 or more days, with some refusing to pay faster than 120 days after invoice.

Red-tape is often acknowledged as the scourge of progress, and the same is true when it comes to big businesses paying small business — ”process” is touted by small business as the most common reason for late payment by big business (83%).

“In our experience, increased regulation and red tape do as much harm as good, particularly when the increased burden on small businesses is taken into account,” Trent Innes, Xero Australia Managing Director. “Rather, we’re looking to the government to bring about non-legislative measures that foster and encourage big businesses to do the right thing, and pay fairly.”

An analysis of Xero’s combined invoice statistics found that, over the past six months, one in five invoices payable by ASX 200 companies to small businesses have been overdue by more than 30 days, with more than 3.8 million invoices currently overdue to small businesses on the Xero platform around Australia.

Big business means big power
A large majority of small businesses that took part in the study (84%) said that big businesses have too much negotiating power, and as a result are found to suffocate small business cash flow, while facing few consequences.

The consequences for small businesses, however, are critical: almost half (49%) of businesses said that late payments hinder growth, while 34% can’t purchase more equipment and one in five can’t hire as quickly as they need to. Most critically, poor cash flow can put a small business’ solvency at risk.

60% of small businesses wouldn’t survive more than 3 months if invoices went unpaid

“Our study found that six in ten small businesses would not survive more than three months if all invoices went unpaid. Some 6% of businesses wouldn’t even last a week,” Innes said. “While the upcoming payments inquiry hints at possible governmental intervention in the near future, small businesses need viable solutions now.”

Technology bridging the gap
Small businesses are turning to technology in order to get paid faster, and to bridge the cash flow gap. Around two thirds of businesses (63%) are using technology and software to monitor and manage payments while the same amount now offer customers an option to pay online, the most popular options including: PayPal, BPAY and mobile payments. The impact technology is having on payments is, in the eyes of Australia’s small businesses, overwhelming.

Almost every business offering one of these online payment options (95.3%) say technology methods are “very” or “somewhat” effective in reducing late payments, while another 59% of these businesses said allowing online invoicing is a major solution to late payments.

“We use technology to make pretty much every part of our lives easier, and business payments has finally caught up,” Innes said. “While technology provides a good solution now, Australia’s small businesses need — and want — to see the government fighting their corner.” Technology plays a role for many small businesses when attempting to get paid faster, however there are still around 37% of small businesses not implementing these solutions that are finding payment terms getting stretched further.

Late payments in, late payments out
Late payments create a domino effect among small businesses, increasing the impact on the economy. Small businesses acknowledge that their biggest cash flow concerns due to late payments are ability to pay suppliers (38%), the ability to pay staff (15%) and declining profitability (24%).

“Not being paid by big businesses puts a lot of stress and strain on a start-up,” said Hannah Spilva, founder of same-day gift service LVLY. “It could be the difference between paying our staff, or not. It could be the difference between keeping up with our rent payments, or not. For us, big businesses and government need to level the playing field to ensure that all businesses—no matter the size—can perform and contribute to the economy.”

Innes said: “We’ve seen some big businesses improve their payment terms in recent months, however more still needs to be done. The conclusions from the payment inquiry will likely act as a catalyst for change, with more big businesses moving away from restrictive payment terms.”

What do you think of this recent development? Let us know how it will impact on your small business by commenting below or sending us a message here

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Read more with our helpful 3-PART CASH FLOW series here:
Part 1: Increasing cash flow
Part 2: Step-by-step guide
Part 3: Managing inventory

Trent Innes
Trent is the Managing Director of Xero Australia, the leading cloud-based accounting platform for small business. Grounded by a strong people-focus, he develops the team to better help small businesses thrive in Australia.

3 COMMENTS

  1. True or Instant eInvoicing does help shorten the invoice cycle. Invoices make it from the accounting system of the supplier, to the accounting system of the customer, instantly. This option has been available to big business for many years and is now available for small business with solutions like Australia’s Link4.

  2. Prevention is the only cure!
    Implementing Terms of Trade that impose penalties for late payments, cost of time spent chasing money owed or the fees for engaging a Mercantile Agent (debt collector) prior to transacting is the only way to guarantee payment.
    Without Terms of Trade, effectively the debt collector has no more authority than the admin assistant that wastes time begging for payment.
    Happy to provide more info at https://bpmb.com.au/customer-service/sarah

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