Specialist insolvency and business recovery practice Jirsch Sutherland believes that the nation-wide problem of delayed invoice payments is set to create a surge in small business insolvencies this year.

According to partner of Jirsch Sutherland, Trent Devine, companies that have cash flow issues are passing those issues on and small businesses are taking the hit.

“The question is: where are small business people going to get the money to fund the gaps? With falling house values, they can’t rely on home liquidity to borrow. That’s why we think it’s coming into a bit of a hot storm this year. We are going to see higher than normal levels of small business failures,” says Trent.

A 2017 Ombudsman’s inquiry identified Australia’s payment times are the worst in the world, with invoices paid, on average, 26.4 days late. And it found that almost one in two businesses have more than $20,000 owing to them due to late payments.

The inquiry also uncovered a growing trend of large Australian and multinational companies delaying and extending payment times from 30 days to even 120 days.

“Increasingly big businesses are extending payment times for their smaller suppliers, using them as a cheap form of finance and therefore disadvantaging the small business owner by locking up their capital – which they could otherwise be reinvesting back into their business to drive further growth,” says Trent.

Construction industry lays solid foundations for insolvency

A 2015 Senate inquiry into insolvency found that the construction industry is burdened every year by an estimated $3 billion in unpaid debts, including subcontractor payments.

Trent explains that a company’s pressure point is the deciding factor for who it will pay.

“In construction, for instance, it can be easy not to pay the tradie, because if the tradie goes bust, he can just be replaced with another. If companies have cash flow issues, they’re going to see where their stress points are and therefore who they can avoid paying.”

In 2018 alone there were 1,642 construction businesses that became insolvent. A high percentage of these are attributed to misconduct.

“Often subcontractors have nowhere to go. They’re out of options. If they’re relying on that one big project in order to remain viable, not getting paid puts massive stresses on their business,” Trent added.

According to Australian data and analytics company illion, at the end of September 2018, the retail sector recorded the worst late payment time among all industries at 13.5-days. Companies operating in the utilities sector came in at 13.3 days.

The Australian Government has recently announced that it is creating a new payments reporting scheme to encourage fairer and faster payment times for SMBs. The government will consult both small and large businesses on the design and implementation – including 3,000 of the largest businesses in Australia.

Trent believes that the new scheme doesn’t address the issues of struggling businesses trying to pay other businesses that they can’t afford.

“Cashflow management is key to running a successful business. As a small business owner, it is critical that you take control of your finances, and be completely on top of outstanding invoices, and late payers. This will ensure that you get that cash in your bank account so you can repay and debt, and plan for growth,” he says.

Trent has put in place tips to help SMBs to take charge of their cash flow.

1. Put a solid cash flow strategy in place. Since cashflow is the lifeblood of any business, implementing a solid billing and strict debt collecting system will inject much needed circulation of funds. With ‘credit clients,’ ensure you have well drafted trading terms in place to allow early and effective intervention when those terms are not adhered to.
2. SMBs often wait until it’s too late. It’s easy for business owners to get bogged down in operations, often missing key warning signs of failing health. Devine warns that many small business operators don’t raise their hand until it’s too late. If you only seek help once cracks begin to appear, then you limit the options available to make effective adjustments to preserve the business. If you suspect your business is in financial difficulty, seek help and act before it’s too late.
3. Continually review your trading relationships. Consider offering discounts for prompt / early payment.
4. Consider debt insurance or debtor finance. But note that these products come with additional cost, so ensure that any pricing includes this in your margin (to determine if it’s worthwhile for you with the backdrop of the risk of not getting paid).