Late payments are costing the economy billions

Andrew Charlton from AlphaBeta has released a new report examining the cost of late payments to Australian businesses and the wider economy. The key findings are as follows:

There’s plenty of evidence that late payments hurt cashflow, employment and wages for small businesses internationally. But there has been little data to truly quantify these costs to Australian small businesses and the economy – until now.

In unique analysis using Xero Small Business Insights, AlphaBeta has calculated for the first time the economic cost of big businesses paying Australian SMBs late. We analysed more than 10 million invoices issued by more than 150,000 SMBs that use Xero’s leading cloud-based accounting platform. Data was aggregated and anonymised to protect the privacy of SMBs and their counterparts.

Our results are a real, compelling argument for getting Australian small businesses paid on time. Late payments by big businesses are sucking $7 billion from the Australian SMB sector, costing the wider economy $2.54 billion in net economic benefits over 10 years.

LATE PAYMENTS HAVE A DOMINO EFFECT THROUGHOUT THE ECONOMY

Each year, Australian SMBs extend an estimated $216 billion in trade credit to large businesses. By analysing Xero data, we calculate 53 percent of trade credit payments are paid late, on average by 23 days. If these late payments were paid on time, it would be equivalent to $7 billion in working capital being transferred from large businesses to SMBs.

Small businesses could reinvest this $7 billion either into reducing their net debt or investing in growth. This reduces their interest repayments or generates additional returns, generating an estimated total of $4.38 billion over ten years in additional economic benefits to small businesses.

Allowing for the costs to larger businesses, this still results in a net economic benefit of $2.54 billion over ten years to Australia from reducing late payments, largely because SMBs pay more for financing than larger businesses.

LONGER PAYMENT TIMES ALSO HURT

Longer payments – irrespective of whether they are late – hurt SMBs. Our analysis found that SMBs paid more slowly than average have about a third lower revenue growth than those paid faster than average. Longer payment times also ricochet across the economy: an SMB paid more slowly than average tends to pay its suppliers more than a week later than an SMB paid earlier.

EVIDENCE THAT CHANGE IS NEEDED URGENTLY

Xero supplied data for this research to champion small business interests. Our research also comes as the Commonwealth Government works to introduce a national Payment Times Reporting Framework that will require large businesses with over $100 million in turnover to publicly report on how they pay small suppliers.

Meanwhile, the Business Council of Australia has introduced a Supplier Code of Practice, requiring signatories to pay small business in 30 days. Federal and State Governments are introducing shorter payment times to SMBs from government agencies, and starting to incentivise or required large businesses to pay faster, or be more transparent about their payment practices.

Given the cost to small business of late payments, this action cannot come a day too soon.

Full report here.

Comments

  1. boomengineeringMEMBER

    Concur, across the board all my clients are late. Wish I was in a business that could hand over product/service on receipt of invoice fee. They kiss my feet before when in dire straits but after problem solved don’t want to know.

    • Cheer up, once QE starts and interest rates go negative, you’ll be asking them to delay payments.

  2. The BCA Supplier Code of Practice seems to be little more than diversionary virtue signalling. There are no consequences for not complying and a number of signatories continue to settle SME invoices in 60-90 days.

    Unless there is legislation with teeth, monopsonists will continue to exploit their market position.

  3. Upfront payments or f*off!

    This point in the cycle is deadly for businesses that give terms. Absolutely deadly.

    • boomengineeringMEMBER

      In my case not deadly but non the less a pain. Remember an engineering shop across from me years ago used to do 100k jobs high speed assembly line work making redundant many worker’s. If I stuck to small jobs not in their interest to screw me down 10% as was his case. End of the year he would be 10% down on me.

      • DominicMEMBER

        Yup, I guess the trick is not to be over-exposed to any one counter-party although many suppliers in the consumer goods businesses (for example) tend to be and cashflow is absolutely key to staying afloat. Once a major counter-party starts to become less reliable with payment things can get very tricky.

        A mate of mine who worked at Santos until recently was saying how the company just sent letters out a couple of years back to various small and medium-sized suppliers saying terms were now 60 days and not 30. No negotiation — just, this is the deal, take it or leave it. My mate had several suppliers ring him up (not his personal fault) with some serious hard luck stories. Absolutely immoral, but when you’re one of the big boys ..

  4. Sadly government entities are often the worst payers. The bureaucracy can fob off payment requests forever and there’s no-one responsible you can talk to.

    • DominicMEMBER

      Very true. On the bright side though you’ll have no problem getting a factoring company to give you liquidity — payment’s virtually guaranteed. Only time is the issue.

  5. My wife has a small business. She now refuses to deal B2B because bigger businesses consistently (and cynically) delay payments in the hope that she just might give up chasing them. The stress is not worth it so she only deals with individuals now – they aren’t perfect payers but at least she can screen them from intitial meetings.

    • Big business has structurally made it impossible to pay invoices promptly.

      I worked at an ASX 20 where it would drive me crazy trying to get my suppliers paid. Even though I was internally getting everything done as promptly as I could, there were a million obstacles getting even straightforward, routine invoices paid.

  6. Here’s the trick – check how the time to pay changes over time. I’m guessing if delays are increasing then recession is ahead.

  7. Small business do not pay their staff on time – sometimes they do not pay their staff at all.

  8. My previous employer was a state based branch of a multinational that supplies food manufacturers. Plenty of our local service providers (deliveries, maintenance, boutique product producers, etc) were small businesses and were constantly chasing payment. We often would have periods of two weeks or more towards the end of each month when we could not get our rubbish collected due to outstanding bills. I couldn’t believe that this happened so often, let alone being standard, accepted practice.