Payment times improve but too many SMEs are still left waiting

First 5000 | January 9, 2018

The problem of late payments for Australian firms is beginning to ease, according to the latest analysis by Illion (formerly Dun and Bradstreet). The average late payment time for an Australian business was 12.6 days during the September quarter, down 9.1% from 13.9 days in the corresponding quarter a year before.

As well as reducing the length of time which bills are overdue, more businesses are also settling their invoices on time, indicating a broad positive shift in payment behaviour.

Late payments are now at their lowest level since 2014, although there is still $27.9 billion in outstanding debt in the economy. Stephen Koukoulas, Illion’s chief economic advisor, welcomed the improvement and noted the figures are in line with a brightening of business expectations.

The sharp fall in late payments reflects better economic conditions and a clear improvement in cash flows. Business cash flows have benefited from higher profits, allowing firms to pay their bills more promptly.

Illion CEO Simon Bligh agreed that ‘Payment behaviour is a crucial sign of business health. If a company’s annual report is like the yearly medical check-up, then payment data is like Fitbit data, helping us track the health of business in real time.  Timely payments are critical to small businesses running on slim margins, reducing the risk of job cuts and business failures.’

Late payments rose up the political agenda in 2017, with the Small Business Ombudsman releasing the results of an inquiry into payment behaviour in March, the Business Council of Australia issuing its Australian Supplier Payment Code in May, and the Prime Minister unveiling major reforms to payment practices on government tenders in November.

Combined with the current low interest rate environment, businesses are under increasing pressure not to sit on cash reserves for prolonged periods and starve their suppliers of funds.

Two thirds of bills were paid according to invoice terms, injecting an additional $6.1 billion into the supply chain compared to a year before.  This offers a significant boost to the economy as a whole, with swifter payments generating greater economic activity in the form of wages paid, additional invoices settled and inventory ordered.

The positive national trend was reflected across the states, with only economically challenged Western Australia recording a rise in late payments in the third quarter of last year.  WA suffered a 4.1 percent increase to 14.1 days, compared to 13.6 days a year before.   Tasmania remains Australia’s exemplar, and the only region to reach single digits, with an average late payment time of just 9.5 days.

The ACT, which has been the worst offender for the last 3 years, improved by 18% between Q2 and Q3 to reach 15.4 days. ACT’s economy is dominated by the government sector, which has always been slower than other sectors to pay suppliers, but new government measures appear to be making their mark.

Late payments fell across all sectors, but retailers and mining continues to struggle, recording the joint slowest average late payment time of 17.9 days due to sluggish growth trends in both sectors.  Utilities, at 16.3 days, and manufacturing at 16.2 also lag behind the rest.

In contract, wholesalers have undergone a dramatic shift, with the average late payment dropping 17% in a year to 13 days. Services led the way among the major industries in terms of paying their bills on time, with an average of 71.4% of bills paid promptly. This aligns with Illion’s November Business Expectations Survey, which revealed a buoyant Services industry.

While large firms with more than 500 employees remain the worst offenders in terms of late payment times, they have reduced the time taken to settle overdue bills to the lowest level since the fourth quarter of 2014.

At 17.9 days, however, they’re still more than four days behind the average.  Large, long established finance, insurance and real estate companies in New South Wales were the worst culprits of all, with average late payment times of almost a month, compared to around 13 days for other firms in the state.

The smallest businesses recorded the largest reduction in late payment time between the second and third quarters of 2017, with firms employing five or fewer people reducing their average late payment days from 14.9 to 12.1, a drop of 18.8%.

It should be noted that Illion’s industry data are not weighted and so the picture may not be as rosy as it seems.  Some of the largest sectors in the economy have the longest late payment times while proportionately smaller sectors, such as agriculture, fishing and forestry, are among the best performing sectors.

Ombudsman reaction

The Australian Small Business and Family Enterprise Ombudsman welcomed the results but said that state governments and multinational companies need to improve their payment times to small business suppliers in 2018.

Kate Carnell accepted that the Federal Government and some big businesses had made significant commitments and lifted their performance in 2017 after her office published its report into late payments and poor practices last year.  It found that many small businesses were being crippled by slow payments and the national economy was suffering as a result.

In response, as noted by the Illion report, the Federal Government announced the introduction of 15-business-day payment terms in November while the Business Council of Australia established the Australian Supplier Payment Code which commits signatory organisations to pay eligible Australian small business suppliers on time and within 30 days of receiving a correct invoice.

However Ms Carnell warned that not every major business has signed up to the voluntary agreement and, until the establishment of the National Payment Transparency Register there had been no reporting mechanism.  She welcomed the commitment of Mars Petcare and Lion to introduce 30 day terms but warned against complacency.

“We know there are still large companies and State Government departments which pay small business suppliers later than 30 days on a regular basis, sometimes more than 60 or 90 days,” she said.

“That’s not acceptable and the culture in those organisations needs to change. I will continue to apply pressure in 2018 to ensure small businesses get a fair go. The ball is really in the court of recalcitrant large organisations. If they don’t lift their game there will be calls for legislation to make it happen and nobody in the business sector wants more red tape.”