With half of small businesses receiving late payments on at least 50 per cent of bills owed, and with bigger businesses contributing to those late payments, something has to change.
Preliminary findings from the Payment Times and Practices Inquiry reveal 50 per cent of small businesses experience late payments on at least half the bills owed to them. What’s more, large enterprises are the worst offenders when it comes to late and extended payment times.
It’s hardly a climate for growth and success, especially during Australia’s ‘economic transition’ to a more diversified economy.
The inquiry explicitly takes aim at the imbalance of power between big and small business and underlying issues associated with the culture of late payment.
Arguably, compassion for the plight of small business owners may have fallen in the way of some real practicable solutions. For example, will the additional rights and legal powers for small businesses outlined as possible measures, or voluntary ‘opt-in’ policies such as the UK’s Prompt Payment Code, offer much in the way of real, practical effect?
A businessman rolling back his sleeve to reveal a wrist watchThink about it this way; imagine you’re an SME. Would you risk losing repeat business and possible referrals by reporting late payments? Probably not. Moreover, will corporates feel compelled to opt in to voluntary policies, or, will imposing legal penalties result in anything other than a raft of penalty notices against companies that simply can’t do any better? Again, arguably not.
We need to seriously consider whether the proposed measures are capable of successfully changing this culture, and if there are other ways to tackle the underlying issues.
The truth is, majority of big businesses aren’t really using the little players as banks. Nor are they maliciously abusing their position of power.
Businesses of all sizes are experiencing the leftover effects from the '80s and '90s, when it was acceptable to run large debts subject to protracted payment periods. It’s assumed big businesses have got millions of dollars to pay, but in reality, they too are also experiencing issues getting paid. The numbers are just much bigger.
This goes to the heart of the issue: why can’t big business pay small business on time?
Large businesses are bound up with ineffective systems and broken processes, and little is being done within the sector to change their ways, or there’s little motivation to change the status quo.
I've spoken with a group credit manager at a large multinational recently, and she commented, “It’s about process issues rather than poor practice. It’s not about not wanting to pay on time; it’s because we have lots of different business units involved in the process, and there’s so much that can go wrong.”
“My team has taken on four new acquired businesses with no extra staff in the last year. That’s 3,000 new accounts.
“What keeps me awake at night is knowing my team can’t get through their ledgers each month. We need to find a way to reach all of our customers, record their disputes and make it easy for them to pay,” she said.
According to our own data, more than 30 per cent of late payments are caused by erroneous data or disputed accounts that can take months to sort out.
The early findings suggest while technology solutions enable SMEs to manage their trade debtors more efficiently, they don’t address the late payment culture. In fact, technology could be the biggest driver for change, for both big business and small business.
“We need to talk more about the issues affecting payments, and a lot of that is going to be about process improvement through technology. We need to ask ourselves, ‘What is best practice?’ And we need the government to support change,” the group credit manager said.
This should be about levelling the playing field and eradicating the bureaucratic mess that bogs down corporate payment processes. Surely that goes someway to address the imbalance of power, too.
“If invoices were received electronically, it would transform a process that’s currently like herding cattle. We have 6,000 contractors and suppliers we need to pay,” the group credit manager added.
IODM data also shows that 70 per cent of debtors pay on the third automated reminder, or go on a payment plan.
We shouldn’t be thinking about technology as a ‘small business solution’ but instead, something that needs to be implemented across the board. If big businesses can use technology to remove the process issues causing late payments, surely the ability to pay small business suppliers will improve markedly.
Damian Arena, IODMHow this might be achieved is for further debate, but some minimum standards when it comes to payment processes should be a starting point.
Is there a valid excuse for any business, large or small, not to be embracing cost-effective technology solutions today?
Damian Arena is the managing director of debtor automation software platform IODM.