The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell issued a statement on 12 February 2020, saying that big businesses continued to flout reasonable payment terms to smaller suppliers. If this continues, she indicated, she will recommend federal legislation requiring all businesses to be paid within 30 days of invoicing.
The issue of late payments is a major cause of cash flow problems for suppliers who work with larger businesses, and has been shown to limit their growth. It stands to reason, then that timely payment is something that businesses and the economy in general, stand to benefit from. However, both businesses and the government have been skeptical of the idea of legally enforcing shorter payment times. That’s because this type of legislation is inherently double-edged.
While regulating payment times might ensure more timely revenues, it also forces stricter payment deadlines on those same businesses. In order to avoid potentially serious penalties, businesses will need to ensure that they themselves can always make payments on time. This presents a significant challenge. Fortunately, alternative finance tools like invoice finance and supply chain finance can help businesses get control over their cash flow, and ensure compliance with any potential new regulations.
Businesses will need better cash flow management than ever
Reliable payment times eliminate one of the biggest cash flow issues that businesses face. Currently, SME business owners in particular can expect to spend as much as 20% of their working hours chasing down late payments. Payment legislation would eliminate this problem entirely, providing businesses with more reliable revenues, and business owners with more time to manage their operations. However, cash flow interruptions don’t just come as a result of late payments. A business facing a budget shortfall for a different reason, such as the recent bushfire crisis, would still be required to pay their own suppliers on time, under threat of legal penalty.
Businesses that can’t make a payment on time might then be forced to pay penalties, which would put them even further behind, causing them to be late on even more payments in a vicious cycle. To avoid getting into such a situation, businesses will need to keep full control of their cash flow, to the point where all late payments can be avoided.
Use invoice finance to manage budget shortfalls
Unexpected budget-breaking costs can arise at any time, and for a wide range of reasons. Regardless of the cause, businesses need to be able to respond almost instantly if they want to avoid any potential disruptions. For example, an equipment breakdown may need to be dealt with within hours to avoid costly operational disruptions. Since the business won’t be able to afford to dip into the working capital that’s budgeted for imminent supplier payments, another source of ready funds is required.
Invoice finance solves this problem by allowing businesses to pay themselves an advance on future revenues. Instead of waiting for clients to pay outstanding invoices, they can work with a financier to exchange them for cash. The financial institution can then provide the business with funds corresponding to most of the value of the invoice – often in a matter of hours. Then, once the customer pays the invoice, the financier pays out the remainder, minus a predetermined fee.
Ensure that outgoing payments are always on time with supply chain finance
Even a well-managed business can find itself unexpectedly out of pocket in the face of looming payment deadlines. Supply chain finance, however, allows businesses to ensure timely payment regardless of their short term financial situation. Rather than paying suppliers directly out of their available working capital, the business’ financial institution extends payment to the supplier on their behalf. Payment to the financial institution can then be deferred by up to 90 days after the invoice date.
This not only allows businesses to make sure that their supplier payments are always made on time, it also extends their payment terms. If federal legislation were to limit payment times to no more than 30 days, that would translate to a possible extension of 60 days, giving businesses plenty of time to manage any short term budget shortfalls.
Applied in this way, supply chain and invoice finance can be regarded as a cash flow safeguard, protecting businesses from potential interruptions. Currently these tools are an excellent way to improve cash flow, boost growth, and free up time that would otherwise be spent dealing with financial difficulties. If the ASBFEO’s expected recommendation for payment times legislation results in new regulations, though, it could become an essential part of every business’ toolkit.