The Payment Times Reporting Act 2020 that received Royal Assent on the 14th October is good news for small business owners in that it will enable them to use publicly available information to make more informed choices about potential customers.
The Act comes into effect on 1st January 2021 and requires ‘reporting entities’, defined as all businesses carrying on enterprise in Australia whose revenue for the most recent income year was more than $100 million; excluding registered charities and not-for-profits; and who have small business sized suppliers (defined as businesses with less than $10 million in revenue for the most recent income year), to provide certain information for public disclosure on a Payment Times Reporting Register maintained by the regulator.
If you believe your businesses qualifies as a reporting entity under the new laws, you should speak to your accounting professional for more information.
It is hoped that the Act will enable reporting entities to improve their payment terms and practices, because according to the Australian Small Business & Family Enterprise Ombudsman’s Supply Chain Financing Review Final Report from March this year, 40% of small businesses were reporting significant cash flow pressures due to late payments, and approximately half of all invoices issued by small business to large businesses are paid late, totalling $115 billion in delayed earnings per year.
Payment terms with customers can make a huge difference to the amount of working capital a small business must raise, often as debt, to finance their stock and debtors for the length of their ‘cash conversion cycle’ i.e. the average number of days from the date they pay suppliers until the date their customers pay them.
Let’s do a quick case study on a typical small business sized manufacturer.
In this example, the business has about 3 months worth of stock in the warehouse, in transit or in WIP. All of their suppliers demand payment on 30 days net, but all of their larger corporate customers stretch payment terms to 120 days (which is not uncommon in the construction industry).
The owner needs to raise $2.215 million from their own cash, shareholder equity or bank lending facilities in order to finance the 120 day terms their customers demand.
Quite expensive if the small business hasn’t got the bargaining power to negotiate better terms, isn’t it? But – what if the owner finds new potential customers on the soon-to-be-launched Payment Times Reporting Register, who are happy to pay on 30 days terms?
If it means the owner can free up $1.23 million in working capital (difference between $2.215 million and $985 thousand in the above table), and use it to pay down their debts faster or reinvest in expanding their business, then the owner will naturally pursue the potential customers with more equitable terms, right?
We hope that this and other reforms recommended by the ASBFEO Report enable a more equitable distribution of risk and reward across all industry sectors, which from my perspective as a 30+ year career banker to both large and small businesses, is long overdue.
Contributed by: Scott Baker Secretary, Cumberland Business Chamber