Any small business which works with larger companies knows that getting their money when a job is complete can be a frustrating process. The ‘culture of late payments’, as it is politely referred to, means that corporations impose their own payment terms on smaller suppliers who have little choice but to accept them if they want the chance to keep winning contracts from the big boys.
This usually means that they are only paid 60, 90 or even 120 days after submitting an invoice. Naturally, this is pretty tough on any SME’s cash flow situation. That has an impact on business financing, growth and investment. Many a small firm has collapsed as a result of late payments; others have missed out on opportunities for lack of funding; and yet more have lost profits because they have had to use expensive business loans or overdrafts to bridge the gap between paying their staff and suppliers, and finally getting an invoice paid.
For too long, this system has been accepted as a fact of life, when it is actually just unfair. Last year the debate was finally ignited when the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) highlighted the practice in its report and called for legislation. However, as is so often the case, Corporate Australia then offered to reform its practices voluntarily and the government decided legislation would not be required.
The Pre-Budget report from the Institute of Public Accountants (IPA) disagrees. The IPA – a professional accounting body representing 35,000 accountants, business advisers, academics and students – said the situation was actually getting worse and lent its weight to the call for legislation.
It said: “We urge the Government to reconsider its response to the report and to adopt all of the recommendations, especially recommendation 9 to legislate maximum payment times for business to business transactions. In the meantime, the situation is worsening despite payment codes and the impact on cash flow for small businesses is critical. Even though the unfair contract terms legislation will have a positive impact, we believe that it will not be enough to change ‘payment culture’.”
Will legislation help?
If a law can be practically implemented to tackle the worst offenders, that will be welcome news to most SMEs. As the IPA correctly pointed out, some large corporates are effectively using their SME suppliers as a cheap (as in free!) form of business finance.
However, nobody seems to be holding very high hopes that a law will be drafted that ensures instant payment for goods and services. And indeed, provided everyone works to similar payment timescales, the system should work smoothly enough. Indeed, if everyone paid invoices within one or two months, this gives all businesses the opportunity to raise some extra cash when they need it by using cash flow financing.
The good news for SMEs is that at least the government is set to start paying on time. By July 2019 all non-corporate Commonwealth entities are to pay all invoices up to $1m within 20 calendar days (equivalent to 15 business days) on receipt of a correctly rendered invoice.
What can SMEs do?
Further good news is that Australia’s SMEs can help themselves – and each other. There are sound financial principles which show the Time Value of Money – in short, that cash in your business’ bank account now is worth a little bit more than a promise of the same amount of money to come at a date in the future. Businesses can use this principle to raise money and save money, by using invoice financing; and they can use the money tim. gives them in advance to negotiate discounts for early payments from their suppliers. That way, everyone is happy.