Cash flow crisis – The Australian Government encourages small businesses to pay on time
Cash is absolutely vital for small businesses – to pay wages, purchase stock, to meet their tax obligations and to create new opportunities. But many small businesses in Australia are in a cash flow crisis, due to the fact that so many of their accounts are being settled late.
A really important part of managing good cash flow is for businesses to make sure they are being paid on time. Late payments are sometimes a result of a lack of credit management policies by the creditor business. In other cases despite the best efforts of the business, they can still be left waiting to receive payments, and this is particularly common when dealing with other business customers.
Maintaining reliable cash flow can mean the difference between success and failure. Dun & Bradstreet estimates that 90 per cent of small business failures are caused by poor cash flow. They also estimate that a staggering $19 billion annually is locked away from businesses beyond the widely accepted 30 day payment term.
In July, the federal government, realising this is a serious problem, released a discussion paper on a proposed Prompt Payment Protocol based on a similar scheme in the UK. The intention is to change Australia’s late payment culture and to unlock the billions of dollars withheld between businesses for payments for goods and services.
The voluntary Prompt Payment Protocol targets late payments between businesses without introducing extra regulation. The Protocol will not only encourage companies to commit to paying on time, but will strengthen business relationships in general.
The introduction of a voluntary Prompt Payment Protocol (the Protocol) aims to foster a broad change in Australia’s late payment culture. It aims to encourage businesses to make paying on time a normal practice. Over time, it will seek to improve contracting practices and support on-time payment, predictability and certainty for all businesses. Aussie businesses of all sizes and sectors will be encouraged to voluntarily sign up to the Protocol and publicly commit to upholding these principles.
The 5 Protocol Principles:
1. Pay on Time
- Pay business suppliers on time within agreed terms set at the outset of the contract
- Do not change payment terms unilaterally or retrospectively
- Do not change the length of the payment for small companies on unreasonable grounds
2. Communicate Early
- Write contract payment terms in clear and simple language
- Give suppliers clear guidance on payment terms and procedures
- Inform suppliers of access to internal complaints and disputes systems if available
- Promptly advise suppliers if there is a reason why an invoice will not be paid within the agreed terms
3. Encourage Good Business Relationships
- Encourage suppliers to adopt the Protocol in their own supply chains
4. Adopt a Complaint Resolution Process
- Adopt a process for reviewing complaints and resolving disputes
- Respond to the complaint or dispute as quickly as possible
5. Identify Yourself as a Prompt Payment Leader
- Have the choice of using Prompt Payment Protocol branding (co-endorsed by business and government) to inform others of your commitment to prompt payment.
You can view the full discussion paper online here.
What do you think about the proposed Prompt Payment Protocol? Do you think it will make a difference to your small business and avoid a cash flow crisis? Comment below to let us know.