The length of time Australian businesses take to pay each other is rising, placing additional pressure on company cash flows in an environment where access to credit has already tightened.
This finding is from the December 2007 quarter business-to-business trade payments analysis from Dun & Bradstreet collections and credit reporting agency.
The Dun & Bradstreet data shows the average payment period across all industry sectors has risen to 52.6 days (more than 3.5 weeks past normal terms) after having eased in the middle of 2007 and is now returning to the highs of late 2006 and early 2007.
Dun & Bradstreet CEO Christine Christian believes that many Australian companies have taken their eye off the ball when it comes to collecting outstanding bills and are now denying themselves access to cash at a time when credit for growth is becoming more expensive and difficult to obtain.
“During the period of strong economic growth and easy access to cheap finance, businesses have let their focus on collections slip without too much impact,” said Ms Christian.
“However, Australian companies are now entering an environment where credit is more difficult and expensive to obtain. This means there will be a greater reliance on free cash flow to fund expansion. Yet many companies simply don’t have the processes in place to maximise cash flow and have left themselves vulnerable at exactly the wrong time.”
Public companies and big businesses (500+ employees) continue to be the worst offenders, averaging 58 and 57.7 days respectively to pay their debts in the December 2007 quarter. The gap between public and private companies has jumped significantly to 5.5 days with public companies now taking 58 days and private companies 52.5 to pay their bills.
While big businesses have consistently been the worst payers, the latest data shows their payment terms are deteriorating at a faster pace than the rest of the business community. The gap between businesses with 500+ employees and those with 200-499 employees has jumped to 4.5 days and is above the long term gap trend of around three days.
Businesses with 6-19 employees continue to be the best payers when examining business size but they have seen a jump from 49.4 to 50.4 days.
State-based analysis reveals that the ACT has the country’s worst payers at 54.7 days, an increase from the September 2007 quarter. New South Wales and Victoria followed at 53.9 and 53.4 days respectively.
Tasmania at 49.6 days maintained its position as the quickest paying state, although it has seen an increase of around two days.
However, there is some good news for Australian businesses supplying the Federal Government. While payment patterns from government departments and agencies around the country have also risen to over 50 days, the Federal Government has responded positively to a proposal from Dun & Bradstreet to enforce strict payments terms among federal departments and agencies.
In a reply to the Dun & Bradstreet proposal the incoming Minister for Small Business, Dr Craig Emerson, advised that the Labor Government would implement a prompt payment policy across all its departments and agencies.
Dun & Bradstreet’s Global Risk Report shows that Australia is not alone in its payment problems but it is the fourth worst payer in the Asia-Pacific region.
India is the worst paying nation with 55.2% of payments made at 30 days or more past terms in the September quarter of 2007. In Australia 42.3% of payments are made at 30 days or more past terms.
According to Ms Christian, businesses need to ensure that they have a solid debt management policy in place. “Debt management may seem dull but having strong collection processes in place is critically important when you find you are paying interest on money being used to cover shortfalls that shouldn’t exist in the first place.”