If cash is king, why have so many SMEs become its pawn?

by | Oct 19, 2019

Australia’s SME sector is something to be proud of. According to the Small Business and Family Enterprise Ombudsman, Kate Carnell, 97 per cent of all Australian businesses employ 19 or fewer employees, making the sector as a whole, very powerful.

Why is it then, that this sector also suffers most from lack of cashflow?

Australia actually holds the world record for late payment of invoices (that’s one world record that we shouldn’t be proud of). In fact, Carnell has called the current situation a “cashflow crisis”.

I have written extensively in other forums about the impact of big companies imposing extended payment terms on their small suppliers, up to 120 days in some cases. But have you ever stopped to unpack why this cash problem is so endemic in our country?

When I ask small businesses why their larger clients take so long to pay them, the answer is simple: because they can!

For example, when the mining industry went into decline in 2013, several of the large mining houses imposed unilateral payment terms of up to 90 days on their suppliers. This was done to shore up their own cash reserves; effectively asking their suppliers (including small and micro businesses) to become their bankers.

However, even today in 2019, with the fortunes of the coal industry have turned around over 12 months ago (prices recovered, production is up, and development projects are in full swing), some of the extended payment terms remain.

Some mining companies will offer shorter payment terms in exchange for a discount on the invoiced price. I just can’t get over the feeling that this is inherently wrong. If you quote for a job and do the work well, you should be paid accordingly.

What many don’t understand however is that late payments don’t just harm the business that is not getting paid. Because one business doesn’t have cash, that business will most probably extend payment times to their own suppliers, or not hire an additional person, or not invest in new equipment. We have known these flow-on effects on the wider community are real, and there is empirical research to quantify it.

To quantify the region-wide impact of these unilateral extensions of payment terms, a Queensland-based industry group commissioned a research report. The results are stunning. The report concluded that:

“If payment terns across the industry were returned to a ‘normal’ 30 days, there would be an extra 250 jobs across the region.”

Over five years, this would generate:

  • An additional 380 jobs.
  • $150 million in wages.
  • $250 million in Gross Regional Product.

Small Business organisations have been calling for payments’ terms reform for decades, and the Federal Government finally committed to 30-day payment terms for all contracts last year; 30-day terms now also extend through the entire supply chain for these contracts as well.

Now it’s time for other industries to catch up. Small Business must no longer be used as a source of credit by their big customers, and regional economic growth must no longer be stifled by the crippling effects of extended payment terms.

Bronwyn Reid, Owner, Small Company Big Business

This post first appeared on https://insidesmallbusiness.com.au on October 15, 2019.