Good companies pay on time

According to Australian Small Business and Family Enterprise Ombudsman Kate Carnell, late payments by large businesses to small businesses account for 53 per cent of all invoices. This means that $115bn worth of payments to small businesses are late and stops $7bn of working capital being available to small businesses every year. What an enormous waste. In a paper outlining early findings of a review into supply chain financing, Ms Carnell said “all businesses, regardless of their size should be paid in 30 days”. At a time when Canberra and Martin Place are trying to pump up consumer spending and business investment to fire up employment and GDP growth, this seems a modest, no-brainer method to get some stimulus into the economy.

As Robert Gottliebsen wrote on Saturday, this is a heads-up to the Morrison government in how to boost the economy by $7bn without spending a cent. Nor will it supercharge asset prices, especially housing, which the Reserve Bank is wary about in an ultra-easy money era. But Ms Carnell stopped short of calling for federal legislation for the 30-day requirement, which Alan Kohler concludes would be “an almost unprecedented government intervention in the market”. Apart from freeing up a huge amount of working capital for the main employers in the country (small businesses), Kohler argues on Tuesday the move “would protect small businesses from bullying by more powerful customers”.

Late payments, due to imbalances of market power, are a blight on our economy. Big companies routinely are stiffing small suppliers because they can. For instance, they’re deploying big data against them. “It is unreasonable for large businesses to use complicated and expensive AI systems to manipulate small businesses into reducing their margins,” Ms Carnell said. Supply chain financing is a useful tool; it helps to free up cashflow for businesses. The problem, of course, is the way some companies use it as a weapon when combined with extended payment times of 60 or 90 days.

Last month, after The Australian revealed the use of AI to squeeze its suppliers, Rio Tinto announced it was ditching its “dynamic discounting” scheme, one year after its launch. Telstra followed suit after Jared Lynch and Nick Evans revealed the telco spent more than a year plotting to unleash supply chain financing on its small and medium suppliers while extending their payment terms from 45 to 62 days. Telstra now has moved to 20-day terms for suppliers with invoices up to $2m annually. Rio Tinto now has 20-day terms for suppliers with turnovers of up to $10m. In a way, this only highlights the problem at hand. What if you fall just outside these parameters? Tough.

The Business Council of Australia has a “supplier payment code” that is voluntary and loose. Kohler argues the definition of small business is too tight and easily fudged, and not policed anyway. Is it under 20 employees (as the Australian Bureau of Statistics decrees) or a turnover below $10m (where some tax breaks apply), or both? “The supplier payment code is just an empty PR exercise, with BCA wanting to appear to be doing something about late payments but actually doing nothing of the sort,” he writes. Perhaps the competition regulator should investigate misuse of market power. The Australian Securities & Investments Commission also should consider regulating supply chain finance. We are not accustomed to advocating harsh laws for free enterprise but some businesses need to pull their heads in, do the right thing by suppliers and help the economy grow.

ASIC’s latest figures on business failures show cashflow problems are responsible for about half of company collapses, with the figure on the rise in the past three years. Small and family businesses depend on smooth and predictable cashflows simply to carry on and grow. Some large companies should look at what the government is doing in this space with its own small suppliers. Last July it implemented 20-day payment terms for contracts under $1m, and five-day terms where both government and business were using e-invoices. Before the heavy hand of legislation hits them for six, in this instance companies should do what Canberra says — and does.