Putting the Big Squeeze on Australian Payment Practices

Brace yourself for impending change through a dire need for innovation in supply chain finance. As George Papanikolopoulos, Head of Supply Chain Innovation at Timelio writes, the key issue facing squeezed suppliers is certainly not a new one. Neither is the growing appetite for large businesses looking for more efficient working capital through longer payment terms. 

Recent events may indicate that the beginning of regulatory processes to legislate Australia’s large corporates to pay on shorter payment terms is near. And as shareholders begin bracing themselves, innovative supply chain solutions are required to help solve the problems facing Australian SME’s.

The Word: According to the Small Business Ombudsman

Small Business Ombudsman (Kate Carnell) revealed on July 28, 2016 that the majority of small business failures are by far a result of poor cash flow, with slow payments from customers or clients a leading factor.

Under control of the Treasury Department, the Small Business Ombudsman was established via parliament legislation in 2015 – and ultimately appointed on March 11, 2016. In its first public announcement in Australia’s The Age newspaper, Late Payers, the Silent Killers of Small Business, it seems to have almost proposed an enquiry into the (late) payment practices of Australia’s large corporates. Practically all key corporate sectors are named in the article.

Bargaining Power Drives Market Power

Perhaps the most fundamental risk involves taking a one-size-fits-all approach; forcing corporates to pay suppliers even before they have produced goods or sold them to customers.  You could say the bargaining power between supplier and customer is driven by their relative market power. But is legislation really the most effective way to offer a working capital free-kick to small business?

Any regulation that mandates short payment terms jeopardises the balance sheet of corporate Australia and could result in:

  • Shareholders demand for higher returns through cost reductions (i.e. potential job losses).
  • A need to improve margins to compensate for increased cost of capital (higher prices for consumers or force suppliers to accept lower prices); or,
  • Corporates reduce investment in working capital (i.e.: buy less per transaction and force suppliers into costly “just in time” supply chain structures).

Ultimately, some of these consequences are likely to hurt the very SME’s they’ve intended to help.

Sparking Shareholder Outrage

Many corporates have extensive working capital cycles – namely the mining, wine and manufacturing sectors. These cycles often involve longer payment terms and at least some of the working capital risks need to be shared with suppliers.

Shareholders in these businesses would rightly be frustrated if they had to assume all the capital risks associated with growing and producing products. 

From Good to Great: Innovate

Innovation in trade finance remains a vital component of the solution set, and much preferred to regulation and legislation. We know regulation can lead to unintended consequences and is a clunky way of shifting costs from one counterpart to another.

Innovative supply chain funding would actually improve the competitiveness and bargaining power of SME’s. Particularly as they fight for business with larger competitors by reducing the funding constraint to seek new business as they make their pitch for that next big contract.

We know that SME’s are screaming out for help when it comes to cash flow and access to affordable funding, two of the issues referenced by Australia’s central bank in a recent conference paper that discussed the challenges facing Australia SME’s. (Of the 12 issues listed cash flow and access to affordable funding were ranked 3rd and 7th in terms of importance).  Innovation in supply chain finance solves both of these issues, whereas legislation may address cash flow but at what cost to SME’s?

Any form of regulation presents issues when it comes to mandating short payment terms by big corporates as there’s still the question of:

  • What the most appropriate payment terms are.
  • The capability of a finance system and payment process to deliver.
  • Enforcement.
  • Penalties; and,
  • All additional costs of increased capital that filter down to end consumers, shareholders, superannuation investors or SME’s.

A Final Word

While the advocacy bodies like the Australian Small Business and Family Enterprise Ombudsman have an important and meaningful role to play, regulating or legislating to solve the problem may not be the best solution.  We’d hope any investigation covers a broad range of solutions, highlighting and focusing on the innovation that is already out there as a means of solving the issues facing SME’s.

What do you think the impact of legislation will be? How would it affect your business? Let us know in the comments section below – or get in touch if you have any questions.

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