Payment times reporting: Keeping up with the times

With increased transparency surrounding large organisations' payment times, Australia’s small businesses will be able to make informed decisions about which large organisations they supply.

There’s a new regulatory scheme putting large businesses’ payment habits under the microscope. You should have heard of Payment Times Reporting Scheme by now, because it began in Australia on January 1 2021.

By Zilla Efrat

The Payment Times Reporting Scheme (PTRS) aims to help Australia’s 2.4 million small businesses make better decisions about potential customers and encourage large businesses to improve their payment practices.

It has been in the works since 2017. Now it is a reality.

The scheme requires Australian organisations with an annual total income of more than A$100 million to report on their supplier payment terms and times. 

Their subsidiaries with annual total incomes of more than A$10 million are also required to report, as are large foreign companies operating in Australia and certain government enterprises. Registered charities are not included in the scheme.

For companies with a standard financial year, the first reporting period will include 1 January to 30 June 2021, with reports due by 30 September 2021.

How PTRS helps small business

Peter Sheehan, partner with audit and compliance firm BDO Australia, says the scheme will benefit small businesses.

“As the information will be published bi-annually by the federal government on a public register, large businesses will be further incentivised to pay their small business suppliers on time and improve payment practices, so as to avoid unfavourable public reporting and the reputational risk that could follow,” he says.

CPA Australia PD (complimentary for members): Webinars – Introduction to payment times reporting scheme for small business and Introduction to payment times reporting scheme for large business. Access now.

“This will be particularly relevant for industries where large companies have used their market dominance to negotiate supplier agreements with small businesses outside of standard payment terms. 

“With increased transparency surrounding large organisations' payment times, Australia’s small businesses will be able to make informed decisions about which large organisations they supply, and it will provide leverage for small businesses to renegotiate contracts, allowing them to proactively manage their cash flow.” 

Nick Fox, payment times reporting lead at Deloitte Australia, adds: “Previously, a large number of owners and salespeople may not have realised that payment terms were something that could be negotiated as part of a sale, and this will likely become more prevalent as small businesses come to gain power through this legislation and realise they will be able to negotiate payment terms. 

“A lot of small businesses fail because of their challenges with cashflow.”

But might be a hurdle for big business

Like Fox, Sheehan believes the PTRS could be challenging for larger businesses. 

“Coming off the back of the COVID-19 pandemic, many businesses are closely managing their cashflow, and some are even facing financial stress,” Sheehan says. 

“Those businesses will no doubt be managing their cash flows by stretching payments as much as possible.” 

Fox cautions that the PTRS has the potential for large businesses to be regarded as using their small business suppliers as a source of working capital, by not paying their bills in a timely manner. 

Indeed, a 2019 study by strategic economics consultancy AlphaBeta has found that more than a third of small business invoices are paid after 30 days, with the average payment time being 63 days. 

This equates to A$7 billion in working capital transferred from small to large business every year.

“There is also a brand implication if the company is ‘named and shamed’ for taking advantage of its suppliers,” says Fox. 

“Larger ‘brand name’ companies will have a particular focus on their performance, given greater public familiarity with them, and the potential for positive or negative press depending on how they are perceived in the market.”

Sheehan notes that the PTRS adds yet another layer of compliance complexity for big business and, as a result, additional cost. 

“At some point this cost could find its way down to the consumer.” 

According to the legislation’s explanatory memorandum, compliance costs for reporting entities are estimated to increase by an average of A$22.5 million per year, on an annualised basis.

The PTRS has a 12-month transition period, which ends in December 2021, before compliance and enforcement measures, including significant non-compliance penalties, apply.

“Our main concern is a slow take-up from large businesses in reporting, because the penalties do not come into effect for the first 12 months,” says Sheehan. 

“Hopefully, this is not the case, because right now it would be extremely valuable for small businesses to have greater commercial certainty as the Australian economy transitions into the COVID-19 recovery period.”

Fox notes that, in its 2019 Paying the Price report, Xero estimates the net economic benefit of the new reporting scheme to the country at A$2.54 billion over 10 years. 

“The job creation potential alone from this kind of impact would be significant, and the public should have visibility of who is contributing to this positive impact, and who isn’t,” he says. 

“Paying small businesses faster should result in those same small businesses paying their suppliers faster, which in turn increases economic activity. It should be a case of a rising tide lifting all ships.

“Ultimately, better cashflow for small business means greater confidence in hiring staff. There’s also potential for large businesses to link their products or services to this initiative. 

“A big business can send a signal and the PTRS is the trust-enhancing mechanism that this signal can be relied upon, similar to heart ticks and health stars.”

Accountants’ role in informing clients

Fox says accounting practitioners should make their small business clients aware of this scheme and lead the conversation on the working capital implications and growth opportunities created by improved payment terms. 

“A large business would process hundreds of thousands of invoices per annum. To do so efficiently and effectively, large businesses create a governance framework, processes and policies that direct the execution,” he says.

“A small business needs to provide all of the requested information in a timely fashion and keep this information current as a means of obtaining an expedited payment. 

“Actively reach out and share feedback on the payment performance, as well as participate in the dialogue on how approval cycles could be shortened, leading to faster payment execution.”

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