Late payments creates cash flow stress on Australian small business

As we have mentioned in a previous article, late payments are the number one cause of why businesses fail. If a business has overdue invoices, they have late payments, which leads to a decline in positive cash flow levels and therefore places stress on the business.

Xero – a leading cloud-based accounting software company revealed a report on the state of payments for Small to Medium enterprises in Australia, which highlights key issues small business face in today’s economy.

Although it’s definitely worth reading the whole article, we have decided just to outline the key highlights from their report for convenience.

1. There are 2.1 million small businesses in Australia that employ 4 million people and generate a fifth of our national GDP.
2. As the vast majority of small businesses have payment terms of 30 days or less for their suppliers, many large businesses command terms of 60 day or more, with some negating to pay faster than 120 days after invoice.
3. An analysis of Xero’s combined invoice statistics found that, over the past six months, one in five invoices payable by ASX 200 companies to small businesses have been overdue by more than 30 days.
4. There are currently more than 3.8 million invoices overdue to small businesses on the Xero platform around Australia.

These findings deliver the strongest backing to date to enforce a payment code within Australia to help bridge the payment gap, also known as the ‘cash flow gap’. This is where the large amount of money owned to SME’s from large companies that is sitting between worked done & invoiced, to actually being paid.

This situation has a direct follow-on impact on a business, from restricting growth, paying employees and results in declining profits. On average, SMEs only have enough cash on hand to run for three months before they are in the red, and considering the average invoice is overdue by 30 days – that leaves only 60 days of leeway. And ironically, this is mostly caused by big businesses who have the money on hand already but impose unrealistic business terms on smaller businesses.

A direct quote from the Xero report revealed this frustration;

“Not being paid by big businesses puts a lot of stress and strain on a start-up,” said Hannah Spilva, founder of same-day gift service LVLY. “It could be the difference between paying our staff, or not. It could be the difference between keeping up with our rent payments, or not. For us, big businesses and government need to level the playing field to ensure that all businesses—no matter the size—can perform and contribute to the economy.”

Why is this the case?

A different report released by the Australian Small Business and Family Enterprise Ombudsman revealed several reasons why this gap exists, and it is much more than just businesses failing or delaying payment. It revealed that 87.5% of business owners and managers only spend up to five hours a week actually chasing up invoices. They are focusing on building the business, managing current work and working on future deals. Additionally, owners are reluctant to follow up on late invoices. It can feel risky and akin to jeopardising the business relationship if the main communication is chasing a client for money, but as the saying goes, someone who does not pay you is not a client.

With this in mind, it’s clear why many propose the adoption of technology and tools to reduce the cash flow gap and induce positive cash flow. With more payment options available more than ever, you should look at what solutions are best suitable for your business to help reduce any burden that arises from slow payers. Many businesses in Australia are leveraging technology with great success, however there’s still many that aren’t so it’s important you review your current processes to understand if adopting technology is the best option for you.

If your clients regularly don’t pay on time, then we recommend you read our previous article on managing debt collection for maintaining a strong cash flow position.