I live and breathe small business and derive great satisfaction in advising clients in the mid-market. Small business is the powerhouse of the Australian economy, contributing approximately 20 percent to GDP.
Founders of SMEs are often innovative visionaries who are not afraid to take risks. I have enormous respect for the way they develop what started out as a dream, a hobby or part-time project into a flourishing enterprise.
Cash flow has always been a significant problem to smaller enterprises, and late payments have had consistent negative impact.
Xero Small Business Insights released today, however, gives some cause for optimism, as the trend towards late payments appears to be decreasing. The average number of days for small businesses to be paid (based on 30-day invoice terms) was 36.2 in June, according to anonymised, aggregated figures drawn from Xero’s subscriber base. This is down from the same time last year, when nearly 40 days was the average.
Over the longer term, there are regional variations. The ACT pays the quickest, with average payments over the past three years occurring at 31.2 days; South Australia is the slowest, with payments taking 38.2 days.
Not only do late payments squeeze smaller companies so tightly that many will not survive, but they illustrate a particularly insidious form of power play. The Australian Small Business and Family Enterprise Ombudsman has cited recent statistics indicating just 12 percent of large ASX-listed companies are paying bills on time, compared to 34 percent of non-listed businesses.
The commercial and psychological imbalance of power between larger companies putting pressure on smaller ones, which have little or no recourse in such situations, is a well-known phenomenon.
Many small enterprises just cannot cope with a lack of cash flow, especially if they lack stable and reliable sources of capital. Late payments diminish working capital and ultimately profitability, and increase anxiety and stress for business owners.
It also creates a poor business environment, making it difficult for the mid-market to thrive.
What can SMEs do in such a situation? The first thing is to obtain the right advice on how to manage their circumstances, not only from a legal perspective but more pragmatically from a commercial standpoint.
They need to resolve how to manage cash flow implications; where to source alternative forms of capital; where value can be locked into the business and how it can be liberated; and in the worst-case scenario, how to stave off insolvency.
With the right strategies in place, late payments need not sound the death-knell for an enterprise. Hopefully, a paradigm shift in the attitude of big business towards the mid-market will also follow, which will greatly add to small businesses’ longevity and their contribution to the Australian economy.