Cash is king – but with a new twist coming

“Cash is king” – you may have heard this phrase more frequently since the coronavirus pandemic and the disastrous financial effect that it has had on all economies around the world.

In Australia, small businesses are often subject to the wishes of their much larger customers, which sometimes includes the Australian government. The problem this creates for small businesses is that they are often left without their “cash” for some considerable periods, whilst the much larger customer decides when the small business invoice will be paid. This behaviour has continued to grow since the GFC, but now the Australian government appears to be trying to do something about it with the introduction of Payment Times Reporting Bill (the Bill) into Parliament on 13 May 2020 [1].

So, what is the problem?

The Australian Small Business and Family Enterprise Ombudsman surveyed 2,400 small businesses in Australia and Kate Carnell, Ombudsman, released her report to the Federal Government in April 2017[2]. Her conclusions included:

1. one in 2 respondents reported more than 40% of their invoices were paid late.
2. 28% of the survey respondents reported 60% of their invoices were paid late in the previous financial year
3. The worst payers were in the Construction industry (no real surprises there), then Mining/Oil/Gas; State Governments; Food; Manufacturing then retail industries.
4. Many large businesses do not monitor their own late payments, nor do they know whether their creditor is a “small business” or otherwise.
5. Asking a debtor at least twice for payment was “normal” for over half the respondents.
6. Late payments account for 43% of cash flow downturn.
7. There were many examples of 45 days from invoice; 60 days from invoice; and “payment upon acceptance” as standard terms with large customers.
8. Australian corporations paid invoices on average 26.4 days late. This rate was apparently (at that time) the worst in the world!
9. And Australian small businesses are the fastest

The obvious result?  A hopeless cash flow for the small business operator owed money by Big Business.

Further, a 2019 study by AlphaBeta[3] highlights the importance of addressing the issue of long and late payments from large to small business. Analysis of over 10 million invoices from more than 76,000 small businesses estimated the quantum of long payments from Big Business is $77 billion per year. More than a third of small business invoices are paid after 30 days, and these invoices take an average of 63 days to be paid.  This was estimated to equate to $7 billion in working capital that is transferred from small to large business every year.

So, not only is cash flow affected, but so is the working capital of most small businesses.  They are, and always have been, helping to fund Big Business.  And at a time when small businesses need all the cash they can get!

There are some 3.4 million small businesses in Australia (those with an annual turnover of less than $10 million). These are the very businesses that, because of the absence of adequate cash flow, even in the short term, are seriously exposed to financial failure during this economic downturn.

The Bill

According to the Explanatory Memorandum, the Bill:

“introduces a new Payment Times Reporting Scheme which requires large businesses and large government enterprises with an annual total income of over $100 million[4] to publicly report on their payment terms and practices for their small business suppliers. In identifying small business suppliers, the Scheme will draw on a taxation legislation definition of small business as those entities with an annual turnover of less than $10 million

The objective of the Scheme is to improve payment outcomes for small businesses by creating transparency around the payment practices of large business entities. By providing access to information on large business payment performance, small businesses will be able to make a more informed decision about their potential customers. Greater transparency on payment practices and performance will also create pressure for cultural change to improve payment times.”

I have my doubts whether that will become reality in my lifetime, but first, let’s consider what will change for Big Businesses if this Bill becomes law.

1. A Payment Times Reporting Regulator will be established.
2. At the end of each 6 months of trading, Big Business will have 3 months to report to the Regulator on their payment times. The report must include:

a) the shortest and longest standard payment periods for the entity at the start of the reporting period; and

b) the proportion, determined by total number and total value, of small business invoices paid by the entity during the reporting period in accordance with each of the following:

• i) less than 21 days after the invoice was issued;
• ii) between 21 and 30 days after the invoice was issued;
• iii) between 31 and 60 days after the invoice was issued;
• iv) more than 60 days after the invoice was issued; and

c) include details of the principal governing body of the entity; and

d) if the entity is a member of a controlling corporation’s group—identify the controlling corporation; and

e) include a declaration by a responsible member of the entity that the report will be provided to the principal governing body of the entity.

In short, Big Business must dob itself into the Regulator, as well as to its parent company, on how long it has taken in the previous 6 months to pay all its small business customers and contractors.

And if Big Business fails to do so? A fine will be imposed of 60 “penalty units”[5]: $12,600.

If Big Business tries to provide a false or misleading report? The penalty increases 350 penalty units ($73,500)

But I’m not a Big Business

Companies with annual revenue of less than $100mil can voluntarily report payment times to the Regulator.  You might ask “why would they?”: because the data will be available to Small Businesses to determine whether they will do business with them.  If an “almost” Big Business wants to take work away from Big Business, and if it is prepared to pay Small Businesses on time, Small Businesses will know about it in advance.  And these “volunteering entities” are not subject to the civil penalty provisions.

But I have no idea whether my customer is Small or Big!

This almost falls into the category of “boohoo” – but the legislation will eventually come to your rescue, with a Small Business Identification Tool to assist reporting entities in identifying their small business suppliers. As the Explanatory Memorandum makes clear, Big Business “will be able to enter identifying information about their suppliers, with the tool returning a negative result for suppliers that are large or medium businesses”.  The data required to populate this Tool will come from the Tax Office.

Great! More red tape

Some Big Businesses may conclude that this is akin to cracking a peanut with a sledgehammer. Some Small Businesses will say: a measly $12,000 fine for not reporting?  How is that going to change anything?  Welcome to the Brave New World post-COVID19.

I agree that Minister Cash may be optimistic to conclude that this legislation will “create pressure for cultural change to improve payment times”.  Small Businesses rarely get to pick their Big Business customers.  And I doubt they will do so, simply because a Government agency has a poor invoice payment track record. Moreover, Small Businesses rarely get to dictate the terms of that business.  This is, however, a step in the right direction to attempt to get Big Business to toe the line on paying their debts.

When is this coming?

Assuming the Bill passes through both Houses of Parliament, the Bill should take effect on 1 January 2022.  This of course assumes that our Parliament will be sitting enough times this year to pass the Bill.  That assumption is very much in the hands of a certain virus doing the rounds.

[1] Ironically presented to Parliament by the Minister for Employment, Skills, Small and Family Business, Senator the Hon Michaelia Cash

[2]https://www.asbfeo.gov.au/sites/default/files/ASBFEO_Payment_Times_and_Practices%20Inquiry_Report.pdf

[3] https://www.alphabeta.com/wp-content/uploads/2019/06/190624-xsbi-payments-report-no.4.pdf

[4] Which for brevity I shall call “Big Business” in this article.

[5] A Federal penalty unit is currently $210 and will be indexed again on 1 July 2020.