Tackle payment times: big response to small biz inquiry

Hammurabi's Code

Hammurabi nailed it back in 1772 BC when he declared: “The first duty of government is to protect the powerless from the powerful.”

When it came to common sense, the sixth king of Babylon was an “early adopter”, earlier than say the 29th prime minister of Australia whose government is still trying to force through tax cuts for big business, although one-third of them don’t pay tax anyway.

If the government is intent on stimulating the economy, there is a policy no-brainer just crying for attention: tackling the blow-out in the time big business takes to pay suppliers. Putting a stop to powerful corporations exploiting their powerless suppliers would not only deliver small-business votes but would speed up the entire economy.

After revelations last year that some multinationals were delaying paying their suppliers for 120 days, the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, set up an inquiry into payment times and practices. Usually, a government inquiry will attract a trickle of public submissions. In this case, it set off a flood: 130 individual submissions and 2,800 survey responses.

Prompt payment matters because poor cash-flow causes many business failures. (Click to enlarge.) ASIC 2015 insolvency statistics

Small suppliers, at the mercy of large corporations, are loath to publicly criticise their big customers. Privately, though, they are fuming at being “screwed” and “used as a bank”.

Many have suffered in silence over the past decade as their customers – the likes of multinationals up the grocery food chain – have pushed out payment times from 30 days, to 60 days, to 90 days and lately 120 days.

The latest ruse in this insidious “procurement” revolution, or “working capital management” scheme, has come care of US food giant Mars. Mars has not only pushed its terms out to four months but is offering its suppliers “trade finance”.

In other words, Mars is not only putting its suppliers under pressure, but is offering to exploit them with a credit facility so they pay interest on top of the money it owes them!

What the ombudsman found

In its investigations, the Australian Small Business and Family Enterprise Ombudsman reached out to 110 multinationals and got a response rate of 50-60%. Among the ombudsman’s preliminary findings:

  • almost one in two small businesses experience late payments on at least half of bills owed
  • six out of ten small businesses experienced increases in late payments in 2015/16
  • four out of ten say they spent between two and five hours a week chasing late payments
  • two out of three say they are owed more than $10,000 – one in ten say they are owed between $100,000 and $500,000
  • six out of ten small businesses say large or multinational corporations always or frequently pay late
  • over seven in ten say they can rarely or never influence or negotiate the payment times and conditions when supplying to a large corporation
  • almost eight out of ten say late payments have an adverse impact on mental wellbeing
  • late payments flow through supply chains – half of the small businesses say being paid late meant they delayed paying their own suppliers.

Rachell Li, Sydney Democracy Network/ASBFEO Payment Times and Practices Inquiry

What can we learn from overseas?

When the ombudsman’s final report is handed down it is likely to deliver a blueprint for reform based on developments overseas. Australia lags behind the rest of the world in acting on this problem. Europe and the UK have introduced various industry codes and legislation to shorten payment times and compel industry compliance.

Legislation may not be needed. As with many things, transparency will be half the battle. If companies have to disclose their payment terms, they will be reluctant to sting their suppliers with onerous procurement schemes.

Besides the overseas precedents – existing models in Spain, Ireland, France and Germany exhibit various degrees of success – there is economic modelling work (albeit not much) that shows faster payments lead to growth in jobs and wages.

It is axiomatic: speed up payments across the biggest sector of the economy, small business, and the whole system speeds up.

Already, some large corporations are moving in the right direction. Coles recently announced it would pay 1,000 suppliers within 14 days. Telstra is moving from 45 days to 30 days or less.

Heading into the federal budget season, and anticipating the usual “jobs and growth” sloganeering, it would be refreshing to see ministers put hand on heart and utter “jobs and growth” with true conviction.

Mars Barred: another US giant skewers small business

This column, co-published by The Conversation with michaelwest.com.au, is part of the Democracy Futures series, a joint global initiative with the Sydney Democracy Network. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.

  • slorter

    Neocons do not want jobs and growth unless of course it benefits the people they represent.

    “reduce the power of government and social forces that might exercise some power within the political economy—workers and peasants and others—and put the power primarily in the hands of those dominating in the markets. That’s often the financial system, the banks, but also other elites. The idea of neoliberal economists and policymakers being that you don’t want the government getting too involved in macroeconomic policy. You don’t want them promoting too much employment because that might lead to a raise in wages and, in turn, to a reduction in the profit share of the national income.”
    Gerald Epstein is a professor of economics and a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst.

    • Michael West

      Seems to be the case. I’ve stopped wracking my brain trying to work out why they never rail about monopolies (ASX) or oligopolies (gas, banks etc). Can only suppose that if it is good for big business, they love it, regardless of economic consequences

  • Ribbons

    I am fairly hardened on corporate antics but even I choked on my weetbix this morning at the idea you hold off payment then offer finance to see them through. That’s just….a bridge too far. Even for shitty corporate companies it’s just too much. It’s next level bad.

    • Michael West

      Yes, my source was fumiing about it. Great to see in the SMH today, Carnell calling it “close to extortion”

  • Suppliers are not the only ones who are being screwed. Coles pay their store managers on a monthly basis.

  • Elaine Herold

    Good evening Michael, I am wondering if you would be interested in knowing what is happening within the Taxi Industry in Queensland, Similar to other states, but we are fighting for a buy back of Taxi Service Licences as it is the only way to create a level playing field, We paid $532,083.00 averaged over the last 5 sales prior to Uber illegally entering Queensland April 2014 and now Government has Deregulated and changed many laws to accommodate all Uber wishes, seeing they were too weak to force this, then Illegal Non Tax Multinational to abide by regulations, Not to mention that they contributed nothing to Government or our economy, Many self funded retirees, disabled, young Mums and Dads are facing bankruptcy and the loss of their homes as the value of a licence is approx. $110,000 currently, and income has dropped approx 60%. This is Government allowing a 98 year old Industry of $15 to $20 billion value to be destroyed in favour of a Multinational, It is believed there has been 40 suicides to date in Ausatralia, The demise of the Taxi Industry will put extreme burden on CentreLink, Public Housing, Pensions, Medicare, etc. not to mention the reduction in spending within the economy, Any help you could offer would be greatly appreciated

  • Jacare111

    It has been told to me by staff that are employed in the duopoly and other enterprises in retail food that it is common practice to charge shelf space for companies to display and sell their products, thereby driving up the price of the product for the consumer. Has any research been done on this from the media perspective?

    If you want to create a law to solve the problem of slow payments, set it up so that it encompasses all industries, and that the money that is due to the suppliers is held in trust. Retail sales are payment at the check out. Okay, all the money from the tills goes into trust and all suppliers are to be paid from that account prior to the balance being released to the owner of the check out.

    What would happen if a large company was to fall over? All of the suppliers are then out of pocket for up to 5 months of supply with a minimal chance of getting anything out of the wreck. This increases the ‘domino effect’ of one company falling over and many other smaller suppliers going out of business which broadens the problem of non payment of entitlements and in some cases full deposits which have been paid. This can be shown in the building industry frequently, and other industries on a too regular basis. Retail (Dick Smith 2016) where both suppliers and those with gift cards lost out. Wedding reception / function venues that have shut up shop with clients having paid huge deposits and suppliers which have not been paid is another industry that comes to mind.

    The brick industry, when they have resellers for their products, demand that all monies are held in a “Separate, identifiable account, which is NOT the day to day account.” Monies are to be there when called for by the supplier from the reseller. Any monies that are left over after payment to the brick company can then be transferred to the day to day account of the reseller. Could this be a model to look at to protect the vulnerable suppliers and customers?

    Food for thought???