Why big businesses are severely impacting Australian SMEs growth with late payments
There are over 2.1 million small businesses operating in Australia, that equates to approximately 97.4% of all businesses operating in the country. When you look at these statistics, it’s quite evident that small business is the engine room for the Australian economy. But when we are talking about being the lifeblood for the economy, we aren’t necessarily just talking about its production and impact on the country’s GDP, but how small business employs a larger percentage of the economy’s workforce.
With small businesses being paramount to a thriving economy, it’s important that we have the right processes, regulations and working environments in place so we provide them we a platform to perform and flourish. Unfortunately, this is not currently happening despite constant calls from the fair work ombudsman to place more emphasis on key issues like reducing late payments times, as one of the biggest issues facing small businesses in Australia (and the world over for that matter) is the state of late payments from larger organisations.
Multiple studies and surveys have been conducted over the years concerning the length of time it takes for large organisations to pay their smaller counterparts, that is small businesses, for products or services rendered. This may not be seen as an issue to them, but to the SMEs, this can essentially make or break their business.
Cash flow has been recognised as the main driver of insolvency for small businesses in Australia, with statistics highlighting around 82% of businesses fail due to having cash flow issues. Untimely payments place significant burdens on small businesses, as it causes a flow on effect resulting in them being unable to pay for their own financial obligations to keep the business operating.
Whilst most businesses do implement positive processes and procedures to help speed up payments and reduce delays, it has been identified that large organisations have placed unrealistic payment terms like 60 days net, or in some circumstances, 90 days net, into their contracts which creates enormous stress on small business to fulfill and meet obligations.
According to a report by Market Invoice, 60% of invoices are paid late, where 1 out of 5 invoices are paid more than two weeks late. Larger companies tended to have worse payment records than smaller businesses, ultimately driving this statistic in the wrong direction.
Unfortunately, late payments are more prevalent now than ever. If we were to dive a bit deeper into the inner workings of late payments, you will find that the retail sector has the highest late payment times, averaging around 14.6 days, while forestry has the least late payments at an average of 4.5 days. It comes as no surprise that companies with more than 500 employees were the longest when it came to late payments, with the quickest payers being companies with 6 to 19 employees.
A significant drop in late payments for public administration industries was highlighted in the report, which is a good sign considering their historical performance in the past decade when it came to timely payments. This is definitely a positive development in which these businesses are improving their efforts to make good on their word to pay on time, although this could also have been partly driven by higher emphasis on this issue from decision makers and influencers.
Another contributing factor to this change could be attributed to lower interest rates, which is helping to streamline cash flows. With low interest rates, various business costs are essentially lower, resulting in more liquidity in businesses to meet their financial commitments.
With the Australian government planning to get involved to try and improve the situation by making it mandatory to disclose how often payments are made, large businesses are trying to restrict this being imposed as they fear that it might impact their competitiveness in the marketplace.
Although organisations are improving, they still currently have favourable terms when it comes to making payments and tend to take advantage of the lack of power small businesses have through exploitative measures such as imposing unrealistic payments terms.
Through various efforts such as regular reporting, which will be made compulsory by the Australian Government, it is hoped that big businesses will comply to these rules and treat SMEs like any other established business and operate on the same levelled playing field.
As outlined earlier in this article, late payments are a major contributing factor to why many businesses fail, and it continues to be a significant issue. With added focus and political pressure from all corners, the Australian Government is making efforts to introduce a 30-day payment plan, where businesses are required to pay SMEs within 30 days of issuing an invoice. However, until this is actually implemented, SMEs should do their best to regularly follow up and develop payment collection processes to make sure their cash flow is maintained to meet its own obligations and have the strong foundations needed to grow your business.
About Marshall Freeman
Marshall Freeman is Australia’s leading debt collection specialists. We have been servicing over 20,000 businesses throughout Australia for over 15 years, which has set the foundation of deploying industry leading knowledge and collection techniques that simply delivers results that are unrivaled. Whether you need assistance with slow payers or collection of bad debt, we offer a transparent and stress free collection process that makes your debt a priority to get you paid faster.
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