Why Australia needs a prompt payment protocol

It is well known that cashflow is the fulcrum of small business. If cashflow is tight things are difficult. If cash flows in as planned, then things are good. Cashflow is important because a small business person rarely has a large cash reserve sitting around doing nothing and waiting for an emergency. And a small business is typically too highly geared to arrange quick finance when operating cash dries up.

If payments are not received by a small business in a timely manner then wages cannot be paid, rent cannot be paid, superannuation cannot be paid, and the ongoing costs of associated services, such as IT, phones, transport and power, will not be met.

In the worst situations a business person will not be able to pay their private bills including mortgages, car repayments and school fees.

Late payments cause financial hardship that can lead to stress, relationship breakdowns and ultimately, the loss of a small business, with consequent physical and mental health issues for both the small business owner and their family.

It therefore follows that the health and wellbeing of the Australian small business sector is critically dependant on the development and maintenance of a national culture of prompt business-to-business payments.

Big business delays

Ironically, there is a growing body of evidence that suggests big businesses are increasingly delaying payments to small businesses for provision of products and services.

Over the last decade a trend has emerged where late payments of debts from some of our largest businesses have increased, placing more small business people and their businesses under significant and unnecessary stress.

Some big businesses will take more than 90 days to pay a substantial debt despite agreed payment terms being 30 days – and this can be the difference between insolvency and a healthy business continuing to operate.

It is very much accepted that any company, particularly a big one with access to funds, should pay their debts within 30 days. However, the mining companies in Australia have an average of 52 days for payment – an average means some pay faster and others will take maybe 120 days to pay.

For small businesses servicing the mining sector, that time delay can be the difference between paying a tax bill or having a tax debt, between insolvency and success, between having food on the table and destitution.

I note the federal minister for resources Josh Frydenberg recently admonished Rio Tinto for proposing to change its payment terms from 45 days to 90 days. We have reached a crisis situation if a resources minister has to also manage the financial behaviour of companies as wealthy as Rio Tinto; more power to Mr Frydenberg for doing that.

One of the biggest retailers in Australia, Woolworths, pays on 60 days. According to Fairfax, Coles’ trading terms for food and grocery suppliers are between 10 and 30 days.

Some of these large companies are effectively using small and medium businesses as ‘banks’ – places where they get interest free loans for long periods so they can increase their profits.

Ask any big business representative or an economist if that is good for the economy; it isn’t.

A national protocol

This issue needs to be fixed once and for all and we believe that one solution is the development and implementation of national prompt payment protocol: a voluntary industry standard where signatories agree to abide by the rules of the protocol and are publicly recognised for doing so.

There are some issues to be addressed under such a protocol.

First, the participation of Australia’s largest businesses – including the mining companies and the supermarket majors – would be essential for commencement. These companies have such a control of the supply chain into resources and retailing that if they don’t pay on time, then most of their suppliers will also not be able to pay on time.

Surely, as good corporate citizens, these businesses could commit to ensuring that they do all they can to ensure the businesses that serve them are paid on time with a view to minimising economic and social harm on the Australian economy.

Paying ‘on time’ would also need to be defined. Simply put, this would mean all payments are made within 30 days unless there is a specific ‘unforced’ agreement operating between the small business provider and the large business customer. Agreements beyond 30 days, however, should be the exception to the rule.

Over the last six years, the average time taken to pay has been more than 50 days and this situation cannot be allowed to continue.

A further consideration of such a protocol is the practice of discounting an invoice for a payment made on time. This behaviour is practiced by some large companies that will pay on time as long as they receive a discount from the full amount of the invoice. Such behaviour is wholly unacceptable and amounts to coercion. It should be outlawed under a national prompt payment protocol.

Prompt payment means full payment within 30 days – plain and simple.

So what should be done next? We believe there is a need to establish a body to design, develop and administer the proposed national Prompt Payment Protocol (PPP).

This organisation should not be a government agency but could commence operations with the help of a government. Ultimately it should be managed by an industry body that is one step removed from government.

It will, however, be vital for all levels of government to participate in the protocol.

A Prompt Payment Protocol would only endorse businesses as complying signatories if they pay on time. The administrator of the protocol would dis-endorse any business that starts to pay late, which would be an embarrassing and public event. The Prompt Payment Protocol can be a powerful and inexpensive way to increase productivity in the Australian business community and decrease stress on individuals.

Peter Strong is the chief executive of the Council of Small Business of Australia

Trending

COMMENTS

Subscribe
Notify of
guest
4 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
John Hutchinson
John Hutchinson
4 years ago

This is absolutely the smartest thing that could be proposed ever. When Bilson was appointed Small Business Minister it was something that I thought he should have pursued as a priority. The first priority should be that any Company listed on the ASX (or its subsidiaries) must pay any business with 30 or less employees within 7 Days (no negotiation).
This would stop businesses with lucrative contracts with (say) Woolworths or Wesfarmers going to the wall because they have strangled Cashflow out of the small business.
Big Business relying on Credit to make payments need to talk to a bank not one of their suppliers.

Steve Smallman
Steve Smallman
4 years ago

It should be a condition of EVERY Local, State or Federal Government contract that suppliers to principal contractors are provided with a payment summary within 7 days of invoice and paid within 30 days of invoice. Currently many major construction companies force their sub-contractors to accept EOM after invoice received and stipulate that invoices are to be sent in the last week of the month. Work performed on the first of May therefore, will have a cheque drawn 30th June at come corporate finance centre and then sent via snail mail.

John Naismith
John Naismith
4 years ago

The introduction of a payment protocol is long overdue. Even 30 days is a strain on small business. If a job is invoiced early in the month you are effectively waiting the best part of 60 days for payment. Steve Smallman has covered this as well. Ironically, its the biggest businesses that are using small businesses as a line of credit. This has to be stopped.

Christine Sutherland
Christine Sutherland
4 years ago

Large businesses are using small businesses as interest free overdraft providers. This is completely unacceptable and must be stamped out.