Small and medium-sized businesses are getting ripped off $7 billion a year because bigger businesses are not paying them $115 billion on time, according to a comprehensive study of invoicing from more than 150,000 businesses.
The research from ASX-listed business platform Xero and economists AlphaBeta is based on more than 10 million invoices and hopes to raise attention to the need for small business to invest in online invoicing technology and for government intervention.
With 46 per cent of small businesses failing in the first five years due to cash flow problems, Xero managing director Trent Innes said improving the timeliness of payment was crucial to the health of small business.
“Cash flow is the lifeline of small and medium-sized businesses needed for making investments such as hiring another person,” Mr Innes said.
AlphaBeta director and economist Andrew Charlton said if big business paid on time that would mean a $7 billion stimulus for the economy. “It has a domino effect on the economy – it goes right through the chain,” he said, “And it’s also a political issue.”
“I know the Prime Minister takes this very seriously and small business minister Michaelia Cash takes this seriously because they don’t want small business to be seen as a bank.”
Mr Charlton said the government was already looking at mandatory reporting for big business payments to small and medium-sizes business and was itself improving its own payment procedures.
The Business Council of Australia has also created its own supplier payment code
But one area where small business could see an improvement is in technology investment. Xero’s report notes that if businesses moved to an online invoicing system they would get paid 55 per cent faster.
Treasury deputy secretary Meghan Quinn said last week that the lack of further investment in technology by businesses had hampered productivityin Australia.
Ms Quinn said mining and energy firms had been good at infusing new technologies into their workplaces to make workers more productive, but other industries were slipping behind.
The late payments have driven small business operators such as Carolyn Stebbing’s advertising firm Little Village Creative to keep cash buffers and invest in technology that cuts the chance of late payments.
Ms Stebbing said when her clients don’t pay on time it can bring business to a standstill.
“I had a situation not long ago where several substantial invoices were overdue. And that can have a flow-on effect,” Ms Stebbing said.
“What clients don’t think about is when they pay late, it can affect dozens of other businesses – printers, film companies, contractors – who depend on small businesses like mine for their livelihood.”
She said she had no choice but to maintain a cash buffer to offset for any late payments and set up an electronic payment system for invoices.
She said if there was a further improvement in the timeliness of payments she would definitely invest the extra cash flow back into the business.
“I would hire a full-time employee or two,” she said. “I need more me’s, people who can manage projects.”
Originally published via Australian Financial Review