By extending payment times to small businesses in the supply chain, large Australian and multinational organisations are effectively using them as ‘a cheap form of finance’, according to a new report by the Small Business and Family Enterprise Ombudsman (ASBFEO).
The report, which responds to the Ombudsman’s inquiry into payment times and practices, highlighted the ramifications, for small business, arising from the practice of late and extended payment times, including restricted growth and solvency issues.
The Ombudsman said only legislation, not voluntary codes and ‘other soft measures’ will compel businesses to meet payment standards and address late and extended payment times.
The report recommended Federal Government, as well as other levels of government, ensure Large businesses pay small businesses promptly by:
- adopting a 15 business day payment time by July 2018.
- requiring its head contractors to adopt the payment times and practices of the procurement through its supply chain.
- extending its payment policies to all its agencies and entities.
- publishing its payment times and policies, and for all its agencies and entities, with performance against best practice benchmarks.
- mandating the use of Project Bank Accounts in public works and construction projects.
- Procuring from businesses which have supply chain payment times and practices equal to or better than its practices.
- Introducing industry codes which regulate business to business transactions to include best payment practices including set payment times.
- introducing legislation for larger businesses [i.e. top 100 listed on the ASX and multinationals] to publicly disclose all of their payment times and practices and performance against those terms.
- introducing legislation which sets a maximum payment time for business to business transactions.
- encouraging the adoption of technology solutions, such as e-invoicing, to assist business to streamline administrative tasks and facilitate payment practices.
The report also identified eight ‘action items’ for the Ombudsman including the development of a National Payment Transparency Register to publish businesses payment times and practices rated against a benchmark for good and bad performers.
Red tape concern
Small Business Minister Michael McCormack said he would be ‘taking some time’ to review the Ombudsman’s report and is very focused on making sure small businesses can negotiate fair payment terms and that these terms are met. He continued, ““60, 90 and 120 days are not good enough. Small business should not be used as big business’ bank. My message to big business is clear – negotiate fair terms and stick to those terms.
Although Trent Inness, MD of Xero Australia welcomed the Ombudsman’s recommendations, he said any solution adopted by legislators needs to be fair, reasonable and achievable.
“A one-size-fits-all approach to payment deadlines, whether it be 15 days or 30, could inadvertently hurt the very people we’re trying to help,” he said. “Layers of regulation and red tape add costs to small businesses, which can lack the time and money that compliance reporting requires.
“What’s important is that businesses are paid in the same amount of time that they are expected to make a payment. Payment times and predictable cash flow are vital to not just small companies but the larger economy. For this reason, Xero has been an advocate of a voluntary code, monitored by the ombudsman’s office, that encourages small and large businesses to make payments promptly.”
See also: Late payment research from Amex and Xero highlights the cashflow burden for SMEs