Slower supplier payments likely as virus takes its toll

A rapid deterioration in supplier payment times is expected as the coronavirus and bushfires starve cashflows.

A rapid deterioration in supplier payment times is expected this quarter as the bushfires and the coronavirus erode consumer confidence and starve cashflows, according to one of the country’s biggest data and analytics firms.

In a move to protect cashflows, companies are expected to delay paying their bills as the Reserve Bank warns the coronavirus outbreak poses a material risk to the national economy, which has had a 28-year run without a recession. Already some of Australia’s biggest companies, such as construction giant CIMIC, have been using supplier “payday lending”-like schemes to blow out payment times, adding further pressure to supplier cashflows. The schemes involve suppliers discounting their invoices in exchange for prompt payment.

Late payments are costing the economy about $7bn a year, according to Australia’s Small Business Ombudsman Kate Carnell, and the use of supply chain financing was further hindering economic growth.

Simon Bligh, chief executive of Illion, which analyses $120bn worth of business-to-business payments, said a “hidden two-speed economy” was emerging with some businesses paying the bills quickly while others were becoming burdened by emerging cashflow problems.

Efforts to contain the coronavirus have already significantly disrupted the economy of Australia’s biggest trading partner, China, which has halted most of its manufacturing and limited the movement of workers, many of whom left the big cities for regional areas during the lunar new year.

As a result, many economists are now forecasting Australian growth to slow dramatically in the current quarter, or even contract. Companies across a swath of industries from winemaking and fashion to vitamins, logistics and petrol have been forced to issue profit downgrades, warning the coronavirus has delivered an unprecedented challenge to sales and supply chains.

Mr Bligh said supplier payment times in the forestry industry blew out by 114 per cent in the three months to December 31, with the average overdue payment time rising by eight days, according to Illion’s latest payments report.

“Our report puts some hard numbers around just how bad the bushfires have been and quantifies the pain being experienced by affected businesses that are now struggling to pay their bills,” he said.

Nationally, late payment times improved by 7 per cent — from 11 days to 10 days — in the December quarter, with Mr Bligh citing overall improved trading conditions and industry and government pressure to cut payment times.

But he expected the uptick to be short-lived, with the outbreak of the coronavirus — which has killed almost 3000 people and infected tens of thousands more as it spreads from China to other parts of the world — hammering consumer sentiment.

“We had the effect of the fires which have dented consumer confidence and now we have got the coronavirus. The combination of those is not a good thing for the economy,” Mr Bligh said.

“Consumer confidence is down and that will hurt small and medium-sized businesses.

“It will hurt retail and then we’ll see businesses trying to manage their cashflow as a result, and I suspect their payment times will slow dramatically in quarter one. I think we might see some quite rapid deterioration.”

Mining remained the latest-paying sector, with the average overdue time rising 6.7 per cent to 13 days. Meanwhile, the retail sector managed to improve its payment times by 15.2 per cent, but was still tardy with the average overdue time 12.8 days.

Mr Bligh said Illion’s data couldn’t capture the use of supply chain financing because it “masked” the effect of late payments.

In January, Rio Tinto and Telstra cut their payment times for their small business suppliers to 20 days and ditched their respective so-called “dynamic discounting” and supply chain financing schemes, after The Australian revealed the pair had partnered with Taulia — a company registered in the low-tax US state of Delaware which uses artificial intelligence and big data to gauge how much suppliers can be squeezed.

The use of supplier payday lending, also called supply chain finance or reverse factoring, also attracted criticism from influential proxy advisory firm Ownership Matters.

“In too many cases the auditors of listed entities appear open to a ‘why disclose’ approach rather than ensuring the financial statements present a ‘true and fair’ picture of an entity’s financial performance and position,” Mr Paatsch said in December.

Small Business Ombudsman Kate Carnell said she would be forced to recommend legislation making payment terms longer than 30 days illegal unless companies stopped using the practice to blow out payment times.

“Telstra and Rio Tinto have moved to 20-day payment terms for SMEs and there is no reason why other big businesses can’t do the same,” she said in January.