Late payments creates cash flow stress on small business

I live and breathe small business and derive great satisfaction in advising clients in the mid-market. Small business is the powerhouse of the Australian economy, contributing approximately 30 percent to GDP.

Founders of SMEs are often innovative visionaries who are not afraid to take risks. I have enormous respect for the way they develop what started out as a dream, a hobby or part-time project into a flourishing enterprise.

Cash flow has always been a significant problem to smaller enterprises and late payments have had consistent negative impact.

The Xero Small Business Insights gives some cause for optimism, as the trend towards late payments appears to be decreasing. According to the figures, derived from the SMEs in the Xero database, the average number of days for enterprises to be paid (based on 30-day invoicing), was 36.2. This is down from the same time last year, when 45 days was the average for small businesses to be paid.

There are also regional variations: the ACT pays the quickest, with average payments occurring at 31.09 days; South Australia is the slowest, with payments taking almost 39 days.

Xero’s report echoes trends announced recently by the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell. Data released from her office in August showed that late payments fell during the second quarter of 2017 by 4.6 percent, while prompt payments rose sharply.

On average, just over two-thirds or 63.8 percent of Australian businesses paid their bills on time. However, just 12 percent of ASX-listed companies paid on time, compared with almost 34 percent of non ASX-listed companies.

Good news then, but there is still cause for concern. Not only do late payments squeeze smaller companies so tightly that many will not survive, but they illustrate a particularly insidious form of power play.

The commercial and psychological imbalance of power between larger companies putting pressure on smaller ones, which have little or no recourse in such situations, is a well-known phenomenon.

Many small enterprises just cannot cope with a lack of cash flow, especially if they do not have stable and reliable sources of capital. Late payments result in lower working capital and ultimately poorer profitability, not to mention increased anxiety and stress amongst the owners of the business.

It also creates a poor business environment, making it difficult for the mid-market to thrive.

What can SMEs do in such a situation? The first thing is to obtain the right advice on how to manage their circumstances, not only from a legal perspective but more pragmatically from a commercial standpoint.

They need to resolve how to manage cash flow implications; where to source alternative forms of capital; where value can be locked into the business and how it can be liberated; and in the worst-case scenario, how to stave off insolvency.

With the right strategies in place, late payments need not sound the death-knell for an enterprise. Hopefully, a paradigm shift in the attitude of big business towards the mid-market will also follow, which will greatly add to the SME sector’s longevity and positive contribution to Australia’s economy.

Read the full Xero Small Business Insights report


One thought on “Late payments creates cash flow stress on small business

  1. Thanks Rob. Very pertinent advice for so many of us who are SME owners.
    Excellent to see the issues highlighted – and solutions.
    Thank you

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