How are you invoicing your clients? Does it always take a long time before you can collect payment?
You will be given information about the current standing of payment culture in our country and how it mainly affects small and medium sized-businesses.
Image Source: Cedar Financial
Recent research carried out by an Australian debt recovery company has found that 63% of SMEs typically wait more than 90 days before pursuing unpaid invoices. Small and medium-sized businesses have helped to keep the Australian economy afloat in the post-mining era. Australia is home to a huge diversity of businesses, from fintech platforms such as City Index to retail and mining companies, but it’s incredibly vulnerable to an endemic late-payment culture that sees big players in the retail, mining, media and IT industries dominate the playing field.
Holding the Supply Chain to Ransom
Many large companies use their buying power to hold their supply chain to ransom. They treat smaller suppliers as a convenient line of credit, only paying invoices when it suits. Many small businesses are forced to negotiate longer payment terms in return for better discounts. This looks good on the larger business’s balance sheet, but it plays havoc with a smaller business’s cash flow.
Image source: The Express Tribune
Some experts believe the scale of the problem is the result of some SMEs not having good credit control systems in place. Many businesses owners have a real problem chasing unpaid invoices, and this problem is not exclusive to Australia. Research in the UK found that 81% of small businesses were reluctant to chase clients because it was “embarrassing”. Unfortunately, this ends up costing many businesses a fortune in bad debt.
PayPal found that it takes 26.4 days for small businesses in Australia to get paid, compared to Japan where most companies pay their invoices before they are due. A survey of 1,000 large Australian companies found that whilst 88% believed it was only fair to settle invoices promptly, 57% freely admitted to deliberately delaying payments. This type of tactical decision has a snowball effect on the supply chain, which inevitably pushes some businesses to the wall.
Desperate Times call for Desperate Measures
As a good example of the level of desperation such tactics cause, Brian McDonnell from PayPal Australia cited a case where a small businesses owner left waiting a staggering 742 days for payment from one client resorted to camping outside the company to force them to pay up. His innovative strategy worked and he received a lump sum payment later that day, but as some small business owners point out, forcing the issue often comes at a cost.
The Cost of Doing Business
Many SMEs discover it can be surprisingly difficult to persuade large corporate clients to pay up, and the larger the client, the less leverage a small business has. The problem some business owners find is that when they do take action against clients for non-payment of invoices, it costs them money they can ill afford. Many larger companies have dedicated legal teams, so they can afford to drag the process out for months. Even when they do end up paying, there is no guarantee the money will be paid in a lump sum.
The UK implemented a Prompt Payment Code in 2008, which has led to companies paying up around 12 days quicker. If Australia adopts the same policy, it could go some way to changing the late payment culture that hinders so many businesses.
What are your thoughts about this? Have you found a solution on your own or has implemented a specific company rule to inhibit late payments?