The overwhelming impact of late payments on Australian SMEs

November 2nd, 2017

 As we welcome in a new quarter, many small to medium enterprises (SMEs) in Australia will have recently finished reconciling their accounts. A large part of this exercise may include reviewing debtors. Chasing up clients with outstanding invoices is an important part of ensuring that your SME's cashflow remains stable, as late payments are proving to be a major issue influencing the performance of Australian SMEs.

So just what kind of impact do late payments have on the backbone of our nation's economy? Let's have a look.

How many Australian businesses struggle with late payments?

  • Just over two thirds of Australian businesses paid their bills on time in Q2 2017
  • Large businesses set the pace for invoice settlements, leaving SMEs with heavy debts
  • Only 12 per cent of Australian Securities Exchange listed companies pay on time

The year got off to a rocky start with the highest incidence of late payments by Australian businesses since the third quarter of 2014, according to Dun & Bradstreet (DNB). The Q1 2017 report indicated that big businesses took the longest to pay debtors, with payments from large to small businesses running 18.3 days late on average.

A survey of over 600 Australian SMEs by Prushka Fast Debt Recovery released at the end of Q1 this year showed that 57 per cent of small businesses had outstanding debts totalling over $10,000 in a normal month.

More recently, DNB's Q2 report showed improved conditions following the Australian Small Business and Family Enterprise Ombudsman's (ASBFEO) inquiry into late payments. A considerable 63.8 per cent of businesses were able to pay their bills on time, an increase of 4.6 per cent from the previous quarter.

Late payments can severely impact an SME's bottom line.
Late payments can severely impact an SME's bottom line.

This progress is also reflected in Prushka's Q2 report, which claimed the proportion of SMEs with high debts each month had decreased to around half.

In a media release, ASBFEO Kate Carnell recognised the positive trend toward better payment times, but highlighted that it was disheartening to see public companies - those listed by ASX - failing to lead by example. A shocking 12 per cent of ASX-listed businesses paid bills on time in Q2, compared to 34 per cent of non-ASX-listed companies.

How do late payments damage Australian SME cashflow?

Late payments create more troubles for small businesses than just headaches. DNB's research points to a strong correlation between the age of a company, late payments, and failures. Businesses with two to five years of operations behind them paid bills almost 20 days late on average, and a whopping 7,360 of such companies failed within the first quarter of the year.

Cashflow difficulties are the natural result of unpaid invoices, and affect a startling proportion of Australian SMEs.

The shocking failure rate of these companies suggests that once startups have grown to become established businesses, they become considerably more vulnerable to cashflow constraints from late payments.

Cashflow difficulties are the natural result of unpaid invoices, and affect a startling proportion of Australian SMEs. Just under half (46.4 per cent) of SMEs failed to be cashflow positive in August, according to Xero's Small Business Insights. While this marks a 4.2 percentage point decrease from the same month last year, it still leaves an sizeable proportion of small homegrown businesses struggling.

Furthermore, in a March 2017 Xero report almost half of SME owners report that late payments hinder growth opportunities. Meanwhile, equipment purchases and staff intake were listed as affected areas by 34 per cent and 20 per cent of owners respectively.

How can my SME avoid the consequences of unpaid invoices?

Maintaining a positive cashflow requires prompt management of outstanding accounts. The median value of individual debts came in at less than $2,000 for 69 per cent of respondents to Prushka's Q2 survey. Combined with the proportion of SMEs struggling with high total debt amounts, this suggests that many SME operators are failing to recognise the significance of smaller value debts to cashflow stability.

Waiting too long for invoices of any amount to be paid puts strain on your company's day-to-day performance, making prompt access to cash vital to your growth. Earlypay offers 24 hour turnaround on Invoice Factoring , providing you with up to 80 per cent of the value of outstanding invoices when you need it. The remaining amount is paid to you when your client reconciles the account, minus a small service fee.

If you're struggling to reach consistent cashflow for your small Australian business, we're ready to help - contact Earlypay today on 1300 760 205.

If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].