Cash is the blood pumping through a business, keeping it alive, well and growing. But any healthy system comes under threat when this flow slows or stops altogether.
How can Australian SMBs keep themselves in shape, avoid late payments and ensure they always have a supply of money?
The burden of late payment
Late payment is a serious problem for businesses everywhere, though things have been improving in recent times in Australia. The average late payment time for Aussie businesses is 11.7 days, down from 15.3 days in 2017, according to Illion.
This is a reflection of improved business conditions in the country in general, but for those firms that are still left out pocket for any period of time, the effects can be very damaging.
Business owners believe the causes of late payment are clear, research from alternative funder Scottish Pacific found:
Government red tape is blamed for slow payments and limited cash flow, by seven out of ten SMBs.
Suppliers reducing their payment terms is another cause.
Customers paying late is a common headache.
The impact of late payment on SMBs is immediate and obvious. Businesses with poor cash flow struggle to take on new work, must revise plans for growth and fail to generate extra revenue, Scottish Pacific found.
Many are forced to extend overdrafts and increase financing costs. Some shut up shop altogether. And chasing payments takes up valuable manpower, which hits productivity.
Promoting prompt payment
The authorities are trying to help. Last year, the Federal Government committed to introduce 15-business-day payment terms for its small business suppliers, as well as creating a National Payment Transparency Register, allowing companies to share information about payment times online.
It’s welcome, but there’s much more that businesses can do. Limiting exposure to late payers, establishing processes to keep funds regularly flowing and using technology to improve payment practices are all steps sensible SMB owners take.
Tighten payment terms
When did you last look at your payment terms? How businesses ask to be paid and when can depend on the sector in which they operate. Retail remains the worst for late payments, according to the Illion report.
This partially reflects weak consumer spending in Australia, but large retailers are also famously slow to pay suppliers, offering stretched payment agreements that smaller firms can hardly resist.
If you want to revise your payment terms, open a dialogue with a customer, pointing out the impact slow payment is having on your company’s ability to fulfil their needs.
If you can offer a discount for upfront payments, consider offering this or the option to pay in instalments.
Might a retainer model be possible, getting a regular payment either on weekly or monthly basis or based on the projected value you’re bringing the client?
There are sectors which have experienced a significant improvement in payment times because they’ve embraced innovation and technology in how they get paid. Services industries, for example, have some of the shorter payment turnaround times in Australia, the Illion report shows.
This reflects the fact they often take recurring payments, which can be easily automated. It’s becoming more common to require this of customers, so cash flow is constant, reliable and healthy.
Invest in the right tech
Are you making the most of online accounting platforms? These systems issue invoices immediately and can embed payment links in the document itself to give customers a ‘pay now’ option. If sums are outstanding, reminders are automatically issued on both sides, while automatic accounts reconciliation saves man hours.
But SMBs are not only benefitting from the most up-to-date accounts technology. They can use new systems to automate payments and command exactly when they get paid, in particular through the use of Direct Debit.
GoCardless works with ever more numbers of Australian SMBs to shift their payments from bank transfers and card transactions to taking money owed via Direct Debit, reducing processing costs, speeding up payment times and boosting cash flow.
How Direct Debit can help
Kiril Shaginov, Founder of Melbourne-based wholesaler, Mörk Chocolate, explains how it works. Using Direct Debit through GoCardless within his billing platform, Xero, Kiril's small team no longer have to spend three hours a month chasing payments from stockists.
“Transactions are automated and happen seamlessly without us having to step in,” explains Kiril. "With GoCardless, once we have a mandate set up with a customer, we can collect payments against variable invoices as soon as they’re due, without having to remind or ask the customer."
Regardless of how SMBs tackle late payment, improving the flow of money into their business is a real need. For success today and growth in the future, establish effective payment processes, embrace tech and automate wherever possible. Your business’s health depends on it.
Mörk Chocolate's story
How the wholesaler boosted cash flow and reduced admin with Direct Debit.