I’m a freelance journalist – granted, one who is also a finance expert – but that’s essentially the basis of my business. So when a magazine (that shall remain nameless) recently took four increasingly terse reminders and 10 weeks to pay a $4,000 invoice, it hurt. And I believe the only reason they paid me even that quickly was they wanted more work from me, and I refused until they made good on the last piece.
Somewhat unbelievably, I lost the gig because the experience made me ask for 50% payment up front the next time… and they were offended!
Late payments are more prevalent than you think
If you’re a small business owner, you’ll have many similar stories. Indeed, data interrogation by accounting software provider Xero has revealed there are currently more than 3.8 million invoices overdue to such businesses around the country.
And you’ll probably be unsurprised to hear it’s the big boys squeezing us little guys the hardest, despite the fact small businesses like ours make up 88% of all Australian businesses. Over the past six months, one in five invoices payable by ASX 200 companies to small businesses have been late by more than 30 days.
This is outrageous and, we now know, having significant impact. A new survey of 500 small business owners and managers by CoreData for Xero reveals being paid on time would reduce stress for small business owners (60%), avoid unnecessary debt (51%) and drive business growth (49%).
While small businesses typically have payment terms of 30 or fewer days, many big businesses enforce 60 or more days on them, with some making them wait up to 120 days after invoice. But a huge 62% of small businesses surveyed reported that, were all the invoices owing unpaid for three months, they don’t think they could survive.
What to do about your cash flow gap
It’s a serious ‘cash flow gap’ – and we all know cash flow is critical, with the ability to pay suppliers and staff, as well as profitability, hinging on it.
What are small businesses like ours doing about it? They’re carefully managing their cash flow and planning ahead (35%), ceasing trading with customers that repeatedly pay late (33%) and increasingly using technology and software that make the payment process as quick and easy as possible (33%).
In fact, small business owners are adopting newer payment methods at a rate of knots. Of the 63% that offer one of the newer payment methods, the most common are PayPal (74%) and BPay (65%).
An overwhelming majority (95%) report some corresponding success in reducing late payments, too.
But there needs to be official action to redress the power imbalance between big and small business and curb the sheer bloody-mindedness of some large customers in paying their invoices late – 57% of survey respondents believe this group pays slower than fellow small business customers.
The bulk of small business owners agree with me. Eighty-six percent want the government to do more to support small businesses getting paid and to also set the example itself. We want government to pay their invoices faster (56%), regulate payment terms and conditions (52%) and favour small business suppliers where possible (49%).
And seven in 10 believe the government also needs to intervene to level the playing field between the David and Goliaths of our economy. 79% would support regulation to force big businesses to pay small businesses more swiftly.
There are economic arguments for doing so: it would ensure efficient throughput to the economy, say 85% of small business owners.
We’ll soon see what is actually to be done. There is a report on payment terms due any day from the Australian Small Business and Family Enterprise Ombudsman. Here’s hoping it helps.
Nicole Pedersen-McKinnon is a financial columnist, commentator and educator, who works for multiple media organisations and also contracts to the government and schools around Australia. www.themoneymentorway.com.
For more details about the survey, and for advice on tackling late payments, visit www.xero.com/au/cashflow-gap