New Government payment terms could drive fairer deals for smaller businesses
Industry representatives and the Small Business Ombudsman have welcomed the Federal Government’s pledge to introduce shorter payment terms for its 6,800 small business suppliers in the hope that other levels of government and larger firms across the nation will follow suit.
From July 2018, Government departments and agencies will pay invoices for contracts up to $1 million within 20 calendar days compared to the current 30, although the new figure still falls short of the 15 days recommended in the Ombudsman’s April 2017 Inquiry into Payment Terms and Practices.
The latest Pay On-Time survey shows that Commonwealth agencies paid 97% of their invoices within a month. Federal Government agencies will now publish their own payment time performance to ensure transparency and compliance.
Industry Reaction
Ombudsman Kate Carnell said the Government’s response to her April report on late payments for smaller firms showed leadership and a willingness to lead by example. “This is a game changer for small businesses and family enterprises that provide goods and services to the Government,” Ms Carnell said. “Cash flow is king for small business and this will make a huge difference. It will save money on interest payments, boost confidence and free up capital for reinvestment.”
Ms Carnell said overseas experience showed significant benefits from faster payment times. Her inquiry cited European Union estimates that each day of reduction in late payment times saves European companies €158 million in financing costs. A U.S. study showed that faster payments to businesses have generated 75,000 new jobs and boosted wages by $6 billion. Ms Carnell also hopes the Federal Government’s initiative will inspire similar responses from states and big business.
Consult Australia, which represents thousands of consulting firms, also welcomed the Government’s move. Its CEO, Megan Motto, said that “cutting red tape and making it easier to manage cash flow turns government into an enabler for small business – critical for industry confidence, our country’s competitiveness, and subsequently economic growth…whilst many of our large firms have the resource to work with the system, too many of our small firms feel they have to work against it….We hear a lot about the government being a model litigant when it comes to procurement reform. This announcement is a step towards the government becoming a model client.
The ASBFEO inquiry
The self-initiated ASBFEO inquiry which prompted the government move was the first of its kind and involved business representatives and states across the nation. Its final report was presented to the Minister for Small Business, Michael McCormack, in March 2017 and argued that late payments have posed a perennial problem for smaller Australian businesses.
Late payments force smaller firms to finance shortfalls in their working capital instead of using healthy cash flows to grow their business. A lack of cash flow is the leading cause of business insolvency and late payments can put smaller firms out of business entirely.
Government action was called for to address the growing trend for large Australian and multinational businesses to extend payment times. Multinational businesses use their bargaining power to delay payments and hoard cash with little regard to the consequences for their supply chains. Extending payment times for small suppliers effectively uses them as a cheap form of finance for larger firms.
The report urged the Federal government to set an example as ‘first mover’, a point Canberra seems to have accepted. Experience overseas shows that prompt government payment terms can spread change payment culture through private industry as well, not least by requiring government terms to be replicated in sub-contracts.
The report’s recommendations also underlined the importance of transparency to help suppliers and customers make informed decisions as well as a firm boundary on acceptable maximum terms. Industry-specific codes on best practise payment times and greater adoption of digital technology should further ease the situation.
A fairer deal for smaller firms?
The Federal payment term pledge gives industry an opportunity to improve its practices without adding to their regulatory burden and the government statement acknowledged the proactive steps taken by the Business Council of Australia’s supplier payments code. The Government has also engaged with the industry-led Digital Business Council development of eInvoicing to streamline administrative tasks.
However while voluntary codes and other ‘soft measures’ allow larger firms to signal their good intentions, they will have to improve their performance on the ground to ward off the threat of legislation to enforce reasonable payment standards over time.