Small business cash flow revolution is on the way

Large businesses could soon be forced to speed up payments to their smaller suppliers. Picture: Bloomberg
Large businesses could soon be forced to speed up payments to their smaller suppliers. Picture: Bloomberg
Robert Gottliebsen, The Australian,

All large Australian enterprises need to be aware that the nation is likely to undertake a massive change in its payments system later this year. And while this change will require some financial manoeuvrings by large enterprises, it will trigger a significant increase in employment and business investment.

The essence of the revolution is that it will be illegal to take more than 30 days to pay a trading invoice if the recipient has fewer than 100 employees or perhaps has a turnover of less than $100 million. So we’re talking about the vast bulk of the Australian business community outside “large enterprise to large enterprise” deals.

Enterprises that do not pay on time are likely be fined a cash amount for each late payment, possibly in line with ASIC fines.

Fines for this illegal activity will be publicly announced so that all people will recognise the members of law-breaking boards. But the punishment will be multiplied because such companies will also be banned from government contracts. Directors of companies operating illegally may find the other companies on whose boards they sit start from behind scratch in competing for government contracts. They will become pariahs.

It’s possible that over time that if state governments and/or local councils refuse to obey the law then they may well be docked payments from the Commonwealth.

I emphasise that Small Business Ombudsman Kate Carnell has not recommended the above measures but in her statement this week she clearly sets out that the voluntary system has not worked and will never work in Australia.

Small Business Ombudsman Kate Carnell. Picture: Ray Strange
Small Business Ombudsman Kate Carnell. Picture: Ray Strange

Sadly our large corporations only respond the stick and nothing can illustrate that better than what happened with the Business Council of Australia.

The once-respected body representing our largest companies assured our Prime Minister that it had a list of companies that were paying within 30 days, and Scott Morrison foolishly praised them. The BCA board members and executives probably believed what they were saying and did not realise they were misleading the Prime Minister.

Those volunteering to subscribe to BCA list of “good payers” had 18 months to comply (how stupid was that?) and BCA never checked them or audited them. There were also lots of loopholes.

So only about half the BCA members registered and a big portion of those who registered (certainly not all) simply forgot about the whole thing and went on delaying payments and finding ways to bash their small suppliers.

In her first statement Carnell said that $115bn of payments had been delayed to small business costing small enterprises $7bn.

But if we speed up payments into medium sized businesses as well as small, then the stimulation to the economy would be much greater than $7bn.

Carnell says that the economic case for faster payment times has been illustrated internationally.

When the Obama administration moved to payments to 15 days’ time a Harvard Business School study found that it created 75,000 jobs and delivered an additional $US6bn to US workers’ pay packets.

When Obama made that move there was a cost to large enterprises because interest rates were higher than today. Low interest rates provide a unique opportunity for Australia to speed up payments to stimulate the economy.

The ombudsman is giving companies and governments until February 28 to make submissions and she will make a report by March 31.

Given that low interest rates no longer stimulate the economy and, like quantitative easing, simply boost asset prices, only big tax cuts, vast increases in government spending and increasing the speed that money moves around the system are available to end Australia’s stagnation.

And even if we can escape a major blow from the spread of coronavirus there will be a short term hangover which will require government help.

Leaving aside specific industry help, the very best way to boost the overall economy it is to speed the money flow.

In Australia the benefits will be multiplied by the fact that there are an army of financiers wanting to fund cash flow supply chains. But they need to be certain that the money is going to arrive on time.

Many companies will pay faster than 30 days from receiving invoice but 30 days is an accepted standard.

In the building industry the accepted standard is 45 days but that is because governments, councils and other contractors delay their payments.

Once that is made illegal the building industry can fall into the 30 day payment ambit. And increasingly, electronic billing means that most companies are able to pay much more quickly than 30 days. While I think Kate Carnell will listen to some of the specific suggestions of the Business Council and its members, their past behaviour means they will not be allowed to dictate longer payment times.

Labor and most cross benchers are right across this issue and know it is vital for the nation. They also know that the BCA still has significant influence over a number of Coalition members. The last thing the Coalition needs is another bush fire incident but they will certainly get that in spades if they act against the national interest in this matter to help mates.

Legislation is made easier for them because the small business ombudsman already has power to demand the necessary documents.