Cash flow is the lifeblood of small business. But for many, being paid on time is more like getting blood from a stone. New research shows that speeding up the cash conversion cycle can yield broader economic health benefits – and governments and companies are finally paying attention.
Sixty per cent of small businesses reported that late payments had increased over the past year, according to the Australian Small Business and Family Enterprise Ombudsman.
Australia’s big banks know exactly how debilitating it can be to their small business customers.
“Many Australian small businesses are buckling under the weight of unpaid invoices,” says NAB’s Leigh O’Neill, executive general manager of business direct and small business.
It then reverberates down the supply chain and acts as a drag on economic growth.
The Ombudsman, which recently completed its final report into payment times and practices, made the situation crystal clear: “Something needs to be done”.
A greater role for innovation
Technology can provide an effective solution for timely and accurate invoicing and improved supplier communication – issues frequently cited as the reasons for payment delays – according to the Ombudsman.
Banks and financial institutions are already using technology to help small businesses help themselves.
NAB has found that using BPAY is the quickest way for businesses to be paid. Last year it introduced the ‘Biller in a Box’ site, which uses interactive tools and straightforward documentation to help smaller businesses implement BPAY faster and more easily.
Recent updates to BPAY’s operational rules and processes now give small businesses that sign up to offer BPAY their own identity, including their own biller code, biller name, and the ability to generate bespoke customer reference numbers.
The Ombudsman’s report also recommended greater use of technology across accounting platforms, mobile payment platforms and e-invoicing. The Government should also expedite the Digital Business Council’s work on e-invoicing to ensure consistent standards.
However, tackling the problem will also take a significant change in corporate culture.
With an average of 26.4 days after invoice due date, Australia is more than a week slower than the next lowest country, Mexico. Meanwhile, US and UK suppliers are paid around three weeks earlier than at home.
Changing Australia’s big business payment culture
Small business is big
business: businesses with under 20 employees contribute a total of $379 billion in industry value added to the Australian economy. They collectively employ almost 45 per cent of the workforce.
A major international study of late payments ranked Australia last out of 19 countries on average supplier payment times in 2015. With an average of 26.4 days after invoice due date, Australia is more than a week slower than the next lowest country, Mexico. Meanwhile, US and UK suppliers are paid around three weeks earlier than at home.
The Ombudsman recommended that the Australian government force larger businesses to start publicly disclosing their payment times, practices and performance, as well as set a maximum payment time for business-to-business transactions.
It also recommended setting up industry codes that regulate business-to-business transactions.
“It is likely that the value of such programs is better realised when the small business can access a supply chain finance (trade finance/invoice finance) solution that leverages the reliable cash flow,” according to NAB’s Leigh O’Neill.
“This might mean that a big company can agree to commercially acceptable payment terms and the payment undertaking of the buyer can then be leveraged by the small business through any one of a range of supply chain finance solutions to act as a source of finance. Typically that finance would be expected to be provided without the requirement for additional security, so the small business is effectively bringing forward sales receipts.”
For every dollar of sales that was accelerated, there was an average increase of 7 cents in annual payroll after four years: small businesses were hiring.
Governments in the US, the UK, and parts of Europe have already introduced measures that aim to staunch the flow of small business casualties and kick-start economic activity.
They include the QuickPay program introduced in the US in 2011, which tightened the government’s standard terms for paying small business contractors from 30 days to within 15 days.
The effect was significant: small businesses received $US70 billion quicker. But the boost to working capital did more than help small businesses survive – it helped them grow.
A recent academic study found that QuickPay generated “a substantial impact of accelerated payment on small business employment”. For every dollar of sales that was accelerated, there was an average increase of 7 cents in annual payroll after four years: small businesses were hiring.
The Ombudsman has also recommended that the Australian Government implement a similar model to QuickPay, paying businesses within a 15 business day time frame by July 2018.
The US QuickPay scheme led to the private sector-focused SupplierPay program in 2014, which saw major companies such as Apple, Coca-Cola and Toyota begin paying small businesses in the US faster.
The emerging recognition that faster payments strengthen supply chains and the wider economy is yet to gain the same traction with big business on our own shores.
Coles is one of a handful of local companies going against the trend of stretching out payment terms. The retail giant recently announced that it will pay smaller suppliers within 14 days, more than halving the current average payment time. This will help over 1000 small businesses – around a third of Coles’ total suppliers – who will need to use electronic billing to benefit from the change.
In the wake of the Ombudsman’s report, Woolworths has followed suit and matched the actions of its biggest rival.
However, it will take a firm commitment across business and government alike, to recognise the broader economic benefits of faster payment cycles. Without change, small businesses will continue to struggle.
This article represents the views and opinions of the author and do not necessarily reflect the opinions of BPAY.
Published by BPAY Pty Ltd. BPAY is offered by over 150 Financial Institutions. Contact your Financial Institution to see if it offers BPAY and to get the terms and conditions. This is general advice – before using BPAY please review the terms and conditions and consider whether BPAY is appropriate for your personal circumstances.