Why do businesses pay late, intentionally?
In general, businesses purposely delay paying their invoices to balance their cash flow. Ensuring incoming cash matches outgoing payments reduces strains on a business. Some businesses pay late because they haven’t received payments and are reluctant to take on debt to pay their bills. Others merely want to avoid cash flow fluctuations and feel entitled to make late payments because ‘everyone else does’. Of course, these late payments can be a real challenge for you, especially if you’re a small business.
Every time a business pays a bill after the due date, there is a flow-on effect for downstream businesses. The business receiving the late payment needs to decide whether to pay their own bills on time or to wait for incoming cash before making outgoing payments. If that business decides to wait for their invoices to be settled before they pay their own bills, this typically means the next business will receive their payment even later. If your business is a little way down the payment chain, you could be looking at significant payment delays.
Australian late payment trends for the 2017-18 financial year
According to Illion, late payments in Australia were down 25% in the previous financial year. This is great news for Australian small businesses as payment times had been increasing during the preceding 18 months.
Of course, late payments are still a big challenge for Australian small businesses. As at September 2018, the average late payment timeframe is 11 days late and 30% of businesses do not pay their bills on time. A massive 88.1% of Australians have been reporting late payments.
If you operate in the retail sector, you’re likely to be hardest hit by late payments as the average late payment timeframe in that sector is 14.5 days. Businesses operating in the ACT have the biggest challenges of all the States and Territories with a 12.1-day late payment timeframe.
Australian late payment trend outlook
If the current trend continues, Australian businesses are likely to continue to benefit from a reduction in late payments. However, as heavy price discounting is putting significant pressure on the retail sector, the upcoming Christmas shopping period will doubtless create further late payment challenges for business-to-business (B2B) brands that service retailers.
The construction and finance, insurance and real estate sectors realised significant falls in late payments over the last year despite recent signs of a softening in the housing market. If predictions of further housing market stress prove true, B2B businesses operating in these sectors may see a renewed rise in late payments over the next financial year.
If your business is facing late payment challenges, there are a variety of strategies you can use to improve your working capital.