Andrew Charlton from AlphaBeta has released a new report examining the cost of late payments to Australian businesses and the wider economy. The key findings are as follows:
There’s plenty of evidence that late payments hurt cashflow, employment and wages for small businesses internationally. But there has been little data to truly quantify these costs to Australian small businesses and the economy – until now.
In unique analysis using Xero Small Business Insights, AlphaBeta has calculated for the first time the economic cost of big businesses paying Australian SMBs late. We analysed more than 10 million invoices issued by more than 150,000 SMBs that use Xero’s leading cloud-based accounting platform. Data was aggregated and anonymised to protect the privacy of SMBs and their counterparts.
Our results are a real, compelling argument for getting Australian small businesses paid on time. Late payments by big businesses are sucking $7 billion from the Australian SMB sector, costing the wider economy $2.54 billion in net economic benefits over 10 years.
LATE PAYMENTS HAVE A DOMINO EFFECT THROUGHOUT THE ECONOMY
Each year, Australian SMBs extend an estimated $216 billion in trade credit to large businesses. By analysing Xero data, we calculate 53 percent of trade credit payments are paid late, on average by 23 days. If these late payments were paid on time, it would be equivalent to $7 billion in working capital being transferred from large businesses to SMBs.
Small businesses could reinvest this $7 billion either into reducing their net debt or investing in growth. This reduces their interest repayments or generates additional returns, generating an estimated total of $4.38 billion over ten years in additional economic benefits to small businesses.
Allowing for the costs to larger businesses, this still results in a net economic benefit of $2.54 billion over ten years to Australia from reducing late payments, largely because SMBs pay more for financing than larger businesses.
LONGER PAYMENT TIMES ALSO HURT
Longer payments – irrespective of whether they are late – hurt SMBs. Our analysis found that SMBs paid more slowly than average have about a third lower revenue growth than those paid faster than average. Longer payment times also ricochet across the economy: an SMB paid more slowly than average tends to pay its suppliers more than a week later than an SMB paid earlier.
EVIDENCE THAT CHANGE IS NEEDED URGENTLY
Xero supplied data for this research to champion small business interests. Our research also comes as the Commonwealth Government works to introduce a national Payment Times Reporting Framework that will require large businesses with over $100 million in turnover to publicly report on how they pay small suppliers.
Meanwhile, the Business Council of Australia has introduced a Supplier Code of Practice, requiring signatories to pay small business in 30 days. Federal and State Governments are introducing shorter payment times to SMBs from government agencies, and starting to incentivise or required large businesses to pay faster, or be more transparent about their payment practices.
Given the cost to small business of late payments, this action cannot come a day too soon.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
