The federal government has unveiled a new policy to address the problem of late payments faced by small businesses. The new policy aims to reduce payment times for businesses with government supply chains contracts and encourage ethical payment practices.
The new Payment Times Procurement Connected Policy – which goes into effect in October this year — requires businesses with an annual income of more than $100 million that are awarded government contracts worth more than $4 million to pay suppliers’ bills (up to $1 million) within 20 calendar days.
Minister for Employment, Workforce, Skills, Small and Family Business Stuart Robert said that the policy would help improve the payment times for suppliers in the supply chains of government contracts of up to 100 Commonwealth agencies.
“Late payments are a significant issue in Australia, and it’s an issue that disproportionately impacts smaller businesses,” Minister Robert said
“Dealing with it is in all our interests, and improving payment times will help these businesses prosper, grow and employ more Australians.
“The Federal Government is leading by example in paying contracts up to $1 million quickly, as we should, and we are now setting that standard for large businesses that receive Commonwealth contracts.”.
Scottish Pacific, a large independent finance provider, estimated that the cost of delayed payments in 2019 was around $234.6 billion in lost revenue. That is, SMEs would have generated more revenue if cash flow was improved, as late payments accounted for a 43% downturn in cash flow.
The Australian Small Business and Family Enterprise Ombudsman, in the Review of payment terms 2019 report, said, “It appears as though large Australian companies and multinationals apply these policies to improve their working capital efficiencies at the expense of their suppliers.
“While the average days to get paid is declining, it is still above 30 days at an average of 36.74 days. Small and family businesses must find other ways to finance the shortfall in their working capital.
“This places stress on smaller businesses with significant ramifications for solvency and mental health. The outcome; small businesses cannot invest in growth and cannot increase employment.”
A 2019 report from Xero, the global small business platform, revealed for the first time the magnitude and impact of late payments to Australian small businesses, putting the value of outstanding, late payments at $115 billion a year.
The research found that half of all trade credit invoices were paid late, and solving it would see small and medium businesses benefit by $4.38 billion over ten years.
Payment Times Reporting Scheme
Within the scope of the policy, large businesses will also be required to report their payment terms and practices under the Payment Times Reporting Scheme to increase the transparency of payment times from large to small suppliers.
The scheme aims to:
- Increase transparency around large business’ payment performance
- Help small businesses decide whom to do business with
- Create incentives for improved payment times and practices
- Help the public make decisions about the large businesses they buy from
How to report?
Reporting organisations shall provide information on their payment conditions and terms to small business suppliers twice a year. The first reporting period begins on July 1, 2021.
The reporting template comes in 3 parts:
- The primary data component of the report template will be a .csv file
- A word file for the report signatures and associated declarations
- Instruction document includes precise definitions and validation requirements
Minister for Finance Simon Birmingham said small and medium-sized enterprises represented 51.6% of Commonwealth contracts by number in 2019-20 and 25.2% by value.
In order to increase SME representation in government contracts, a new exemption has been in place since December last year, allowing Commonwealth agencies to directly engage SMEs for the procurement of goods and services valued up to $200,000, Minister Birmingham said.
“This will reduce red tape for SMEs and deliver value for money for the Commonwealth,” he added.
To assist large businesses and government agencies to understand their policy rights and obligations, the Payment Times Procurement Connected Policy Guidelines are now available on the Treasury website.