“A huge issue”: Ombudsman to examine the effect of late payments on small business cashflow

Businesses and government departments paying invoices late will come under the microscope in a review into the effect late payments have on small business cashflow, to be conducted by Australian small business and family enterprise ombudsman (ASBFEO) Kate Carnell.

Announced on Monday, the new review, which comes as late payment times form up as a policy priority for the government, will be conducted in response to a written request by Minister for Small and Family Business Michaelia Cash.

It will follow a 2017 inquiry conducted by the ombudsman’s office which found Australia was a global laggard on payment times, with invoices fulfilled on average 26.4 days late.

Carnell says late payment times are one of the biggest drivers of cashflow issues for Aussie SMEs, which itself is the primary reason for business insolvency.

“It’s still a huge issue. Some companies have improved their game, but we’ve still got a huge amount of work to do in this space,” Carnell tells SmartCompany.

“Payment times are still dreadful”

The review will examine how late or extended payment practices affect small business cashflow, as well as how many business owners are providing discounts for on-time payments.

The ombudsman has also written to some companies to request copies of their payment terms and conditions to suppliers.

“Outside government departments, in areas like the health sector, the utilities sector … payment times are still dreadful,” Carnell says.

Tackling late payment times is firming up as a part of the Morrison government’s small business agenda, with work underway across the public sector to reduce payment times to small businesses.

Following a government review last year, the government set out a target to reduce its invoice payment window for contracts from 30 days to 20 days across the public sector.

The Department of Jobs and Small Business has set its own target of paying small business suppliers within 14 days.

The overwhelming majority (95%) of contracts entered into by the government are below $1 million and are considered to be SME contracts. Currently, 96% of government invoices are paid within 30 days

E-invoicing could save $28 billion

The improvements are being driven by a rollout of e-invoicing technology, which creates an online portal where payments can be processed, rather than through paper invoices, fax or emailed PDFs.

ASBFEO estimates suggest the potential benefit of switching to e-invoices is about $28 billion for the Australian economy over 10 years, with 1.2 billion invoices changing hands annually.

It costs about $30.80 to process a paper invoice or $27.97 for a PDF invoice, but only $9.18 for an e-invoice, Carnell told estimates last month.

“If federal government picks up e-invoicing across the whole of government and undertakes to pay small business really quickly, within five days or less, then there will be a real incentive for business to pick it up,” Carnell says.

In August, the NSW government committed to paying small business invoices within five days by the end of 2019, a commitment not yet matched by the federal government.

Cash told estimates last month that efforts to reduce payment times across business will deliver benefits for cash-strapped SMEs.

“Cashflow is king for small business in particular, so there are multiple benefits not just on this side of the table but obviously to the person who is actually issuing the invoice,” Cash told estimates last month.

Business code uptake laggs

In the private sector, the Business Council of Australia (BCA) has created its own code of conduct, which commits signatories to pay small businesses within 30 days.

Carnell and Council of Small Businesses of Australia (COSBOA) chief Peter Strong are currently involved in a review of the BCA code that is examining its effectiveness.

There are concerns the BCA code does not cover enough businesses and does not require companies to report on their compliance within the 30-day payment commitment.

There are currently 47 BCA member signatories to the code out of the organisation’s 139 members. A further 37 businesses have signed as non-BCA members.

ASBFEO’s 2017 inquiry into payment times found there was a growing trend among large companies extending payments from 30 days to 45, 60, 90 or even 120 days.

Other issues include seeking discounts for on-time payments and offering loans to cover extended terms.

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