The Australian Small Business and Family Enterprise Ombudsman (ASBFEO), in partnership with the Small Business Commissioners in New South Wales, Victoria, South Australia and Western Australia, and in association with the Council of Small Business Australia (COSBOA) and the Australian Institute of Credit Management (AICM), was conducting an inquiry to examine payment times and practices in Australia.
Input was sought from state and territory governments and authorities, along with other relevant stakeholder groups in addition to businesses large and small.
This was the Ombudsman’s first self-initiated inquiry and culminated in the presentation of a final report to the Minister for Small Business, the Hon. Michael McCormack MP, in March 2017.
Two issues affecting businesses of all sizes are:
- Late payment times: getting paid beyond the agreed time in the contract; and
- Extended payment terms: payment times beyond usual industry standards.
Both of these issues are related to trade credit terms agreed between businesses when conducting business. Trade credit is the practice of supplying goods and services to businesses or individuals with payment at an agreed later date.
Late payments have been a perennial problem for businesses in Australia. Recent research shows Australia lagging internationally. Late payments affect cash flow of the business owed the outstanding debt, forcing them to find ways to finance the short fall in their working capital instead of being paid on time and using the cash flow to grow their business. A lack of cash flow is the leading cause of business insolvency and this underscores the importance of the issue of late payments which can easily put many businesses out of operation.
Against the backdrop of late payments, there has been a growing trend in payment practices, particularly amongst large Australian and multinational businesses, to extend payment times. The growth in extended payment times is partly linked to the practices of multinational businesses who apply global policies to improve their working capital efficiency. Extending payment times for suppliers effectively uses the businesses in the supply chain as a cheap form of finance.
The growing trend for extended payment times impacts the economy in two ways. Firstly, it slows down the flow of cash through supply chains which limits the growth of businesses as they have more capital tied up in financing their operations and secondly it raises costs for businesses which are financing longer trade credit to their customers.
When a business experiencing extended payment times also experiences late payments, it will stress the business further with significant ramifications for the solvency of the business. Aside from these business challenges, there are a range of personal effects which spill-over, including mental health issues.