How late payments are sending small business to the wall

Tardy payments are having a serious affect on the cash flow of small businesses.

The small business ombudsman says big companies are sending Australia’s small businesses to the wall by not paying their bills on time. There are calls for the government to act.

By Stuart Ridley

Too many Australian small businesses are in financial stress because their outstanding invoices are being paid a month or more late. The biggest offenders are multinationals but some government agencies are also guilty of dawdling on payments.

That’s the damning picture of small businesses’ cash flow issues revealed in an April 2017 report from the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell. 

“This is enough to send a small business broke,” said Carnell on the day her office released its Payment Times and Practices Inquiry Report

“Ninety per cent of small businesses go broke for cash flow issues and this is a cash flow issue,” she added, putting the blame on multinationals – including Fonterra, Kellogg’s and Mars – that have pushed payment terms of 120 days as standard. 

“No small business can last,” she said.

The ombudsman’s report concludes that the Australian Government must legislate against tardy payments for big business and small – and big players must be made to publicly disclose how well they fulfil their payment terms.

Australia has about two million small-to-medium businesses (SMBs), which have a major role in the local economy, so late payments have a significant trickle-down effect.

Poor cash flow means that some businesses end up defaulting on their obligations to staff, to suppliers and to other small business owners. It can also impact on business owners paying their tax and, therefore, becomes an issue for all taxpayers.

Small businesses treated like cheap lines of credit

The ombudsman’s report cited data collected from 2783 Australian businesses to show that the 30-days-or-less standard payment time favoured by almost all (96 per cent) businesses was ignored by many payers.

  • About half of Australian SMBs reported more than 40 per cent of their invoices were paid late last financial year
  • One in five businesses reported an average payment delay of more than 60 days
  • Almost one in two businesses have more than A$20,000 owing to them
  • One in four businesses are owed more than A$50,000
  • 14 per cent are owed more than A$100,000
  • 57 per cent of respondents needed to borrow or use credit cards due to late payments to their business
When asked which kinds of organisations are most likely to make late payments:
  • 56 per cent nominated large businesses 
  • 37 per cent cited other small businesses 
  • 21 per cent said government agencies were late to pay their invoices
“There has been a growing trend in payment practices, particularly among large Australian and multinational businesses, to extend payment times,” Carnell says in the report. 

“The growth in extended payment times is partly linked to the practices of multinational businesses who apply global policies to improve their working capital efficiency.

“Extending payment times for suppliers effectively uses the businesses in the supply chain as a cheap form of finance. Small business should never have to act as a bank for big business, helping to finance multinational companies. Something must be done. The government has a role as first mover to reverse the trend.”

The ombudsman’s findings are supported by MYOB’s recent Business Monitor survey which found, among other things, that 32 per cent of small business owners struggle to cover regular expenses such as rent and power bills when invoices aren’t paid, and 35 per cent report that their personal finances were impacted.

Mid-size businesses (with an annual turnover of A$2 million to A$300 million) are in a tough position, too, according to research commissioned by American Express Australia and conducted by RFi Group. The results were published in March 2017 as Behind the Balance Sheet: Unlocking Hidden Value in Credit, and the survey of 355 Australian CFOs at mid-size businesses found:

  • Each mid-size business is owed an average of A$66,000 from suppliers
  • 30 per cent of mid-sized businesses can’t reconcile all their invoices at least every other month
  • 24 per cent of payments to mid-sized businesses are overdue

What’s the answer?

The ombudsman’s report found that many small business owners are too busy to make chasing payments a priority. The business owners said they’re more focused on operating and growing the business, including generating new invoices.

  • 46.1 per cent spend an hour or less each week chasing late payments
  • 41.4 per cent spend two to five hours
  • 12 per cent spend between one and two days a week chasing payments 
The report also revealed that SMBs appear to be less willing to issue stern letters of demand, engage debt collection agencies or begin legal proceedings when owed money, although these tactics are standard for big organisations, even when chasing small debts.

One reason SMBs are reluctant to push for payment is the belief that “imposing penalties for late payments can have unintended negative impacts on goodwill and winning future work”. 

The report says the damage caused by late payments included significant stress, anxiety and other mental wellbeing issues for almost 80 per cent of the small business owners it surveyed; more than a third were also at risk of insolvency or liquidation.

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“We saw cases of really long payment times, six months and longer, where big business lost invoices and knocked them back for pedantic issues like ‘page four of the invoice has the incorrect code’,” Carnell said. 

“What should happen is the banks and big companies should be good corporate citizens and realise if we want small business to be the engine room of the economy, there’s got to be fast payment times for them and simpler, fairer contracts.”

Responding to the ombudsman’s report, Australia’s Minister for Small Business, Michael McCormack, called on big business to negotiate fair terms for paying invoices and to stick to them. “Sixty, 90 and 120 days are not good enough. Small business should not be used as big business’s bank.” 

Supermarket giants Woolworths and Coles have each committed to pay suppliers with net sales of less than A$1 million within 14 days. Woolworths says it already pays many of its fresh produce suppliers on a weekly basis. The ombudsman is calling on all businesses to follow their lead. 

How the government can help

To address late payment stress, the ombudsman recommends that Australia’s government:

  1. Adopts a 15-business-day payment time by July 2018.
  2. Extends its payment policies to all its agencies and entities.
  3. Legislate for larger businesses to publicly disclose their payment terms and actual performance against those terms.
  4. Create industry codes to regulate business-to-business transactions to include best payment practices, including set payment times.
  5. Legislate to set a maximum payment time for business-to-business transactions.
Read all 10 recommendations in the full report

Good payers vs late payers

Want an invoice paid early? 

Do business in these countries:

  • Japan – 6.5 days early 
  • Belgium – 4 days early 
  • Netherlands – 3 days early 
  • Switzerland – 0.8 days early 
  • Germany – 0.5 days early
The worst performers:
  • Australia – 26.4 days late
  • Canada – 12 days late 
  • US – 7 days late
  • UK – almost 6 days late
  • China – about 2 days late
Source: State of Late Payment 2016 report commissioned by UK finance platform MarketInvoice

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