Late client payments set to wreak insolvency havoc for SMEs in 2019

The national epidemic of delayed invoice payments is set to create a huge surge in small-business insolvencies over the course of this year.

Delayed payment (or even non-payment) is already a significant issue in Australia. A 2017 Ombudsman’s inquiry identified Australia’s payment times are the worst in the world, with invoices paid, on average, 26.4 days late. And it found that almost one in two businesses have more than $20,000 owing to them due to late client payments.

Increasingly big businesses are extending payment times for their smaller suppliers, using them as a cheap form of finance and therefore disadvantaging the small business owner by locking up their capital – which they could otherwise be reinvesting back into their business to drive further growth.

Construction industry lays solid foundations for insolvency

When it comes to the issue of actual non-payment, construction is an industry in which large-scale problems are disturbingly prevalent. A 2015 Senate inquiry into insolvency found that the industry is burdened every year by an estimated $3 billion in unpaid debts, including subcontractor payments.

Who companies pay often depends on where their pressure points are. In construction, for instance, it can be easy not to pay the tradie, because if the tradie goes bust, he can just be replaced with another. If companies have cashflow issues, they’re going to see where their stress points are and therefore who they can avoid paying.

Often subcontractors have nowhere to go. They’re out of options. If they’re relying on that one big project in order to remain viable, not getting paid puts massive stresses on their business.

However, construction isn’t the only industry where payment conditions are a significant issue. According to Australian data and analytics company illion, at the end of September 2018, the retail sector recorded the worst late payment time among all industries at 13.5-days. Companies operating in the utilities sector came in at 13.3 days.

The Australian Government has recently announced that it is creating a new payments reporting scheme to encourage fairer and faster payment times for SMEs. While the new scheme is extremely welcome, it still doesn’t address the issue of struggling, cash-strapped businesses to pay other businesses money that they can’t afford. Cashflow management is key to running a successful business.

As a small-business owner, it is critical that you take control of your finances, and be completely on top of outstanding invoices, and late payers. This will ensure that you get that cash in your bank account so you can repay and debt, and plan for growth. Here are a few smart tips to help SMEs take charge of their cashflow:

  • Put a solid cashflow strategy in place. Since cashflow is the lifeblood of any business, implementing a solid billing and strict debt collecting system will inject much-needed circulation of funds.
  • SMEs often wait until it’s too late. If you only seek help once cracks begin to appear, then you limit the options available to make effective adjustments to preserve the business. If you suspect your business is in financial difficulty, seek help and act before it’s too late.
  • Continually review your trading relationships. Consider offering discounts for prompt/early payment.
  • Consider debt insurance or debtor finance. But, note that these products come with additional cost, so ensure that any pricing includes this in your margin (to determine if it’s worthwhile for you with the backdrop of the risk of not getting paid).

Trent Devine, Partner, Jirsch Sutherland

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