Damaging delayed SME payment time cost quantified
(16 March 2020 - Australia) Australian SMEs are holding out on customer invoice payments for 56 days on average according to the latest Scottish Pacific SME Growth Index release.
The smaller the business, the more protracted wait times become according to the research conducted by East & Partners, based on direct interviews with 1,200 SME owners, CFOs or corporate treasurers across a representative sector breakdown nationwide across Australia running continuously since 2014.
For small businesses with A$1 - $10 million annual turnover, the payment wait time blew out to 66 debtor days in comparison to larger sized SMES with A$10 - $20 million turnover where debtor days averaged 40. The range of ‘debtor days’ for SMEs ranged between a week to as long to almost five months, affecting smaller businesses at a disproportionately higher rate. The average payment timeframe of 56 days is almost twice as long as what the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) is fighting for regulators to standardise industry wide.
The research also found that regardless of size and scale, SMEs across the board have almost a third of their revenue tied up in outstanding invoices, with 16 percent in overdue invoices (+90 days outstanding). Each SME has up to A$1.55 million in overdue invoices for 90 plus days on average, with a high number unable to accurately determine their financials due to unreliable payment times.
The research follows the Ombudsman Kate Carnell going as far as to pass legislation drafting into law that all suppliers be paid within 30 days of invoice, inclusive of SMEs, the middle market and institutional segment. The ombudsman has made the call for fairer treatment of small business suppliers by large corporations utilising their goods and services, following on from its review into the use and abuse of supply chain financing against small businesses. The final report into the review is expected by the end of this month.
“Money that could be used to expand revenue and invest in growth is being tied up for too long, as SMEs struggle to be paid within a reasonable timeframe. This is a significant burden to bear and reinforces the importance of reducing payment times, in particular for SMEs struggling to source new funding or to refinance their existing borrowings. There is a great disparity and we see as businesses become larger they get paid more quickly” stated Scottish Pacific CEO Peter Langham.
“At the extreme, some small businesses are waiting up to four months to be paid and almost one in 10 SMEs can’t state their average debtor days, with some struggling to calculate the figure because invoice payments are too variable to reliably report” Mr Langham added.
“The research shows that at any given time, SMEs have a third of their revenue tied up in outstanding invoices. That’s money they could be spending on growing their business. The bottom line is that all businesses should be paid within 30 days. Over the past few weeks we have seen both Telstra and Rio Tinto move to 20 day payment terms for their small business suppliers and there is no reason why other big businesses can’t do the same” said Ombudsman Kate Carnell
“The ASBFEO Supply Chain Financing Review has revealed the voluntary Supplier Payment Code is just not working. Formal recommendations will be made in the final report to be handed down in the coming weeks. In the meantime, the federal government is consulting on its draft Payment Times Reporting Framework legislation that will require big businesses to be more transparent about their payment times. Businesses and interested parties have been given the opportunity to provide their feedback on this proposed reform which is designed to drive cultural change in business payment performance in Australia” Ms Carnell added.