Telstra payments backflip a potential game-changer for small business

Telstra CFO Vicki Brady. Picture David Smith

Australia has taken an important step towards speeding up the flow of money around our supply chains. It’s the most effective economic stimulation gun in the national locker.

The latest decision by Telstra, the largest telecommunications company in Australia, will put enormous pressure on other corporate giants to do the right thing by the nation.

Then, 20 hours later, Rio Tinto dramatically changed its payment terms for small business, setting the scene for all large corporates to follow.

And it becomes vital that the government urgently speed up speed its plans to accelerate payments and to punish laggard slow paying large corporations quickly and severely.

Australia has always needed faster payment of small and medium sized enterprises. But the bushfires and the coronavirus have added considerable urgency. Nevertheless, to many it’s a surprise that the private enterprise CEO accelerating the pace is none other than Telstra’s Andy Penn.

A month ago Telstra, along with the St James Square London brigade at Rio Tinto, appeared to be leading the Australian nation in the other direction.

Then came nation-changing journalism by my colleagues at The Australian, Jared Lynch and Nick Evans, plus a few well-chosen comments from yours truly.

In response, last week both Telstra and Rio Tinto dropped their “dynamic discounting” tactics where small suppliers were selling their Rio and Telstra debts at a discount.

Then this week, first Telstra set the scene for supplier payments by large enterprises to small and medium sized enterprises to be accelerated dramatically.

The background is important.

Telstra struggled with defining “small” and “medium” business so instead they said anyone who supplies up to $2 million worth of goods to Telstra will be paid within 20 days of receipt of invoice. Twenty days on receipt of invoice sets a New Australian benchmark

The measure covered 85 per cent of Telstra suppliers. The remaining 350 or so larger suppliers will be negotiated one-on-one. At least for Telstra, it’s both elegant and easy to implement.

Effectively, what Telstra chief financial officer Vicki Brady has calculated is how much of the Telstra turnover the company could afford to pay in 20 days.

The calculations showed that 85 per cent of suppliers were involved in orders of $2 million or less. Accordingly, they will be paid within 20 days of receipt of invoice. The Telstra system will cover any likely future definition of small and medium business but it also means a large enterprise (say Google) who supplies orders totalling $500,000 will also be paid in 20 days. Those supplying more than $2 million worth of orders will be paid on a negotiated, case-by-case basis.

Telstra will start the new system before the end of the financial year – five months away. Given the bushfire and coronavirus emergencies, five months should be the be the change benchmark for both companies and the government.

Rio Tinto chose a simple system --- payment 20 days from receipt of invoice for any small enterprise with a turnover less than $10 million. Every large company in Australia should immediately follow, taking either the Rio or Telstra route.

The government is introducing 20 day payments and has made good progress but one or two incompetent public servants are dragging the chain. They need to be removed. No excuses should be tolerated.

I believe the ALP will not countenance bad public service administration and ministerial direction which delays the fast payment revolution.

Clear rules needed

But we need to set clear rules and set them fast. Small business ombudsman Kate Carnell is investigating the high-cost discount financing rackets that many large company boards have embraced to hit vulnerable suppliers. She needs to speed her report and include in it a clear definition of small and medium business and recommend a system companies can follow. She may in part embrace the Telstra path.

However I expect that her report will reveal bad practices by large cooperates that will shock the nation and make it easier for parliament take action.

The government believes it needs to have the power to discover what is actually happening with supplier payments on a delinquent company-by-delinquent company basis. The truth can be hard to determine without wide investigatory powers. The plan is that companies that don’t meet the required fast payment rules will not be able to supply any arm of the government.

Given the penalties, the rules must be clear. Readers will remember how I set out the BHP method of helping small suppliers. It was a big advance on most large companies although Telstra has now gone further.

But a supplier contacted a third party passed onto me that BHP has in its rules a crazy stipulation that states that the fast payments concession does not apply if the supplier has more than 20 staff. Very few BHP suppliers (fewer than 2 per cent) are affected, because most receive their fast payment by being located next to BHP operations which has no employment constraint. The clause came out of the old Business Council of Australia payment guidelines, which were defective. A somewhat embarrassed BHP is happy to drop the provision but is looking for clarity in the base rules so that all its changes are made together.

Australia will need to step up spending to counteract the bushfires and coronavirus. The US and world sharemarkets are now downgrading the likely impact of the virus. But Australia is going to be hit and the government will need to spend more as well as ensure faster payment of bills — with measures dating from the receipt of invoices. And it’s needed urgently because, apart from massive increases in spending, we have few stimulatory weapons because lower interest rates actually slow the nation.