Late payments amongst Australia’s SMEs have been an ongoing issue for many years. To address the issue, various policy measures have been introduced, especially when it comes to larger businesses paying SMEs. Until 2020, these measures have largely been voluntary and haven’t improved payments times or addressed the cash flow handbrake that late payments cause. The Federal Government sought to change this with the Payment Times Reporting Scheme, which took effect from 1 January 2021. In this article, we take a look at the scheme and the true cost of late payments to Australian businesses and the economy.
What is the Payment Times Reporting Scheme?
The Payment Times Reporting Scheme (the Scheme) is a public reporting framework in which businesses and Government enterprises with annual income over $100 million have to report on their payment times to small suppliers with an annual turnover of less than $10 million. The key objective of the Scheme is to address the issue of late payments between big businesses and small businesses. Civil penalties will apply to organisations who fail to report.
How much are Australia’s late payments worth?
Late payments to small businesses are worth approximately $77 billion per year. These payments are those paid longer than 30 days from the invoice date. At least 30 per cent of these invoices are paid more than 30 days from the invoice date, with the average around 63 days, placing significant cash flow pressure on the business.
What are the effects of late payments on working capital?
Having the ability to get paid quickly is key for any business, but especially small businesses. Many small businesses aren’t yet at the size and scale to manage their cash flow more than a month or two in advance. While it should be a goal for small businesses to accumulate adequate cash reserves to withstand uncertainty or economic headwinds, in the meantime, they may feel the cash flow crunch as a result of late payments. And if a small business was relying on upcoming payments to fund their immediate expenses such as wages, rent and stock, it means these businesses can fall behind on their payments too and end up in a negative cash flow position.
The difference between working capital and cash flow
It’s important to understand the difference between working capital and cash flow. Working capital drives your cash flow, which is typically made up of inventory and accounts receivable in your business. The amount of time it takes to convert your accounts receivable and inventory to cash is the working capital cycle. The final element to be aware of is how long it takes you to pay your suppliers. For many businesses, while a business waits to convert their inventory and accounts receivable to cash, they may hold off on paying their creditors. This becomes an important component of managing your working capital, though if you’re experiencing negative cash flow, it may result in your business making late payments too.
Payments between big businesses and small businesses aren’t the only problem
When cash flow is restricted in small businesses, they have challenges meeting their payment obligations to their suppliers. Some of these suppliers may be small businesses too, which continues to perpetuate the late payments and cash flow challenges across the economy. This is likely one of the reasons that Australia is one of the largest users of trade credit in the APAC region, with 71 per cent of business-to-business transactions occurring through trade credit.
While trade credit can allow businesses to access the goods and services they need without upfront payment, the business effectively becomes a lender to the customer. In fact, if all of the trade credit offered across Australia each year were added together, the $1.3 trillion total would make Australia’s trade credit equal to that of being the fifth largest bank in the country. With these numbers, it’s easy to see the magnitude of Australia’s late payments and current B2B payment systems and processes.
Boost your cash flow and make late payments a thing of the past with Spenda
Our suite of digital tools, including our payments platform, is helping businesses get paid faster, while delivering improved cash flow management across the entire supply chain.
If you’ve been looking for smarter ways to address late payments and boost your cash flow, book a demo to see Spenda in action and learn how we can help your business.