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Life After Covid: Always Paying On Time – Or Even On Demand – Is Set To Be The New Normal

15th February, 2021, by Jonathan Dutton FCIPS

The new Payment Times Reporting Act was law in Australia from 1st January 2021 – will large firms ‘paying in 30 days’ see the end of the growing supply chain finance industry or, oddly perhaps, become the making of it? Jonathan Dutton investigates for Supply Clusters members ….

Click here to read this article on the Suply Clusters website

Cash-flow is the lifeblood of business – especially for small and medium enterprises (SMEs) who balance the IN’s of revenue with the OUT’s of direct costs + overheads on a daily basis. Then, often, face the big monthly question, can we make payroll? This is how many of our SMEs live in normal times. In abnormal times, well…

Strategic procurement from SME suppliers in 2021

Three questions for professional procurement managers will get sharper as we get closer to the end of federal government Jobkeeper support in March 2021:

1. Which of our SME suppliers are important to our operations in future?

2. Which of these are under real threat to survive next year?

3. What are we prepared to do in order to help them survive?

These questions are perhaps more important to ask in Australia – an oligopolistic market of few suppliers at the best of times, and a small far-flung market at the very tip of the global supply chain for many international suppliers in any event.

The cash-flow killer

It is well accepted that lack of cash-flow is far and away the number one cause of business insolvencies. In business school they often talk of low cash-flow being the primary cause of 98% of business insolvencies.

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company's ability to create value for shareholders is determined by its ability to generate positive cash flow

If you can pay your bills when they fall due, all good. And SMEs often seem to limp along with this simple challenge as a primary goal.

If you cannot consistently pay your creditors when your debts fall due, then insolvency inevitably looms. And it can come surprisingly quickly for the unwary. Worse, continuing to trade whilst knowingly insolvent is a crime and company directors face heavy civil & criminal penalties including fines up to $200,000, disqualification, compensation and, even, in some instances, potentially jail.

Federal Government Covid support for business

Yet, from early in the pandemic crisis, the government recognised the impractical limitations of this aspect of the Corporations Act 2001 and they issued temporary amendments to make doing business under lockdown restrictions easier and safer for directors.

These included measures to protect otherwise healthy businesses from having to declare insolvency (due to the crisis) with an effective moratorium on insolvencies (now extended to 31st Dec 2020) offering a safe harbour for directors, and with changes to thresholds that spark insolvency as well as other practical changes to make doing business easier under lockdown.

Longer term changes to the Corporations Act in this area have already been flagged by the federal government – so, watch this space.

The impact of Jobkeeper on SMEs

But the higher profile and more direct help for businesses has come through financial help via the six month SME cash-flow boosts from March-Sept 2020 (scaled tax credits against the BAS, in effect) and through the famed Jobkeeper scheme, of course.

As the end of Jobkeeper now approaches, at the end of March 2021, many predict a wave of business insolvencies. The help of Jobkeeper to keep part-paying staff mitigates the largest costs for many SME’s - Payroll.

The big question for most SMEs now, therefore, is can they survive without direct help on payroll costs and, more particularly, can they now raise the cash to get back into business properly (pay staff, rent, buy stock, invest in marketing) and then can they survive when demand is far from back-to-normal levels – even initially uneconomic levels of demand?

Some of the early post-lockdown freedoms allowed for businesses (10 patrons inside a café) seemed to ignore economic reality. Ten customers do not a business make. In fact, in competitive markets SMEs usually have relatively high break-even points and only really make money when operating close to capacity. Not at 5% of capacity or less – more like over 75% capacity. To many SME owners these rules, at the time, clearly illustrated how little some politicians (and some state governments for sure) grasp the basics of business – especially when they interchange words like ‘revenue & profit’ in their speeches.

Payment Reporting Bill 2020

One exception is perhaps the new Payment Reporting Bill 2020 - the next act in the government’s roster of help for SMEs, who employ almost 50% of the Australian workforce, which perhaps explains the keen interest of the Australian Small Business & Family Enterprise Ombudsman (ASBFEO).

Kate Carnell is the inaugural Ombudsman since 2016 and acts as an independent advocate for small business owners working to influence the nation’s lawmakers to ensure legislation and regulations are put in place to help small businesses grow. She has been a harsh critic of slow payments to SMEs and has been well reported – extensively in the Australian Financial Review (AFR) newspaper.

This Payment reporting bill was introduced quickly with bi-partisan support and has taken only seven months from first reading (13th May 2020) to become law from 1st January 2021.

Briefly, this new law requires that large business (over $100m revenues) pay small businesses (those under $10m revenues) all invoices due within 30 days. Full stop.

Importantly, this rule applies to both private sector companies and government departments and agencies. It also requires detailed reporting. And there are heavy penalties for transgressors including heavy fines – up to 0.6% turnover, which could be $180m for a big four bank size company, or even just $24m for an organisation with sales of just $4bn.

But, perhaps worse for some, a register is to be published by government monthly to “name & shame” organisations that do not comply. Including the government’s own departments!

Payment Reporting Bill 2020: PENALTIES FOR NON-PAYMENT WITHIN 30 DAYS Fines can be applied up to a limit of 0.6% Annual Turnover

Organisations can be ‘named & shamed’ on Govt register of non-compliance through a public website.

A changing business culture

Interestingly, as part of the campaign around the passage of this bill, the Prime Minister, Scott Morrison, was reported to have told a business audience in one speech earlier this year that he had persuaded parts of the federal government to pay their suppliers within just five days. He challenged business leaders to do the same – ‘if it is possible for the federal government, surely it is possible for big business‘ he reportedly exhorted them.

During the crisis, in Melbourne, one large mining firm tailored their leading brand-building TV ad to boast about paying their suppliers within five days. The Victorian Government also used TV ad time to say they were working to pay their entire invoice backlog promptly and all suppliers quickly.

Maybe the business culture is shifting a little … that it feels increasingly unacceptable to take advantage of suppliers; perhaps in the same way even that our Aussie culture now judges unfair treatment or underpayment of staff?

Remarkably, this feeling is a far cry from the aggressive approach to suppliers proffered by one leading global management consultancy not so very long ago - and corroborated by more than one source. In essence, they were allegedly advising client CFO’s to simply write to all their suppliers demanding universal extra discounts and advising of immediate 90 day payment terms. No longer perhaps.

SMEs factoring invoices for liquidity

Factoring has been commonplace practice for many SMEs that manage their cash tightly. Especially those with high direct costs (stock, raw materials, packaging, shipping) where money out to their suppliers is often instant and money in (revenue) from clients can be slow to arrive – especially in the B2B sector, when selling to much larger customer organisations.

Factoring is a useful tool to fuel an SME’s cash-flow – a business ‘sells’ its debt to a financier for a fee or percentage (typically around 5% or so, or perhaps 1–2% per week) to get immediate payment from them, and the financier collects the correct sum when due from the larger customer.

Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.[1][2][3] A business will sometimes factor its receivable assets to meet its present and immediate cash needs.

The role of Supply Chain Finance

A newer variant of this approach is “reverse factoring” or supply chain finance (SCF). In this form, the initiation of the factoring opportunity is precipitated by the BUYER ….

Ten years ago, the reverse factoring market was still very small, quoted as accounting for less than 3% of the factoring market. Today, this number has increased significantly, and could perhaps increase more in future as needs dictate?

Unlike traditional factoring, where a supplier wants to finance its receivables, supply chain financing (or reverse factoring) is a financing method initiated by the ordering party (the customer) in order to help its suppliers to finance its receivables more easily and at a lower interest rate than what would normally be offered..

How it works …

There are different forms of reverse factoring, but the principles can favour both the buyer and the seller. Different schemes can even blend the tenants of factoring, reverse-factoring, supply chain finance and simple trade finance or business loans to contrive tailored solutions for individual organisations or identified supply chains.

With simple SCF approaches the procurement manager can proactively choose which supply lines, suppliers or even individual invoices can be reverse-factored. Different criteria can be used by the buyer at their discretion to determine this list. These options are loaded into a cloud-based IT system, usually the chosen financier’s system.

A sliding scale of terms for early payment is temptingly offered to those pre-approved suppliers. Depending upon WHEN exactly they need payment, these suppliers can trade an ‘extra’ discount on the agreed Purchase Order price for payment on a named day. Perhaps ranging from say 5 or 6% discount or more for immediate payment on invoicing, down to basis point discounts (just fractions of 1%) for later payment – at 30 or 45, 60 or even 90 day terms? Suppliers can even choose split-payments on different terms.

When they do so, the new ‘discount’ is remitted by the financier back to the buyer – less an agreed fee for the financier, naturally. This can be a fee more than a percentage, and can be profitable for lenders; certainly in an era official RBA interest rates at almost zero.

Of course, firms with income under $10m now have a legal right for payment within 30 days. But many firms turnover sales of more than $10m per annum – around 38,000 firms in the country to be exact (ABS statistic FY19). Moreover, even those firms with 30 day payment terms as a new legal right, can choose payment earlier – even to the day.

What makes the whole strategy work in practice is the invitation to suppliers branding less of a stigma to ‘factoring’ solutions. In fact, SCF options taken in this way can even be blind to the buyer – reducing stigma entirely.

Also, crucially, a more mature and more flexible financing industry with bespoke cloud-based systems and instant on-demand financing decision cycles can operationalise SCF – same day, even. Suppliers can just select their best options online, when they have pre-approved access to the system – pleasingly, without set-up costs to the supplier.

The benefits of a supply chain finance approach

For suppliers, they can literally choose which day they get paid, and weigh the small additional cost of this. It brings liquidity-on-demand. In tough moments it can stave off insolvency – or just help SMEs over the ‘speed-bumps’ of day-to-day cash-flow timing. It is also often lending without security, certainly against property or key assets.

This may be a crucial decision, for example when PAYROLL is due for a small business and debtors have been slow to pay or, by circumstance or clumsy timing, too many creditors need paying this week. This on-demand payment service can be well worth a few percentage points at a key time – especially when this is an SME’s own business decision.

During 2021, as Aussie SME’s invest hard to get back towards a new normal for their business, a new facility like this offering payment-on-demand by the day is a useful insurance towards business continuity and bringing a flexibility day to day practical business sometimes needs in tough times. Other benefits include sustaining higher levels of working capital to facilitate growth – which were explained in a previous Supply Clusters article by COO Mike Wilson


In addition, any supply chain finance solution (SCF) should typically be ‘non-recourse’ to the supplier. So rather than using a debt finance product, such as loans, or factoring, SCF gives the supplier cash settlement of their invoice with all the benefits as if the buyer had paid them and without any of the worry of non-payment issues.

I would include that SCF should typically be non-recourse to the supplier. So rather than using a debt finance product, such as loans, or factoring, SCF gives the supplier cash settlement of their invoice with all the benefits as if the buyer had paid them and without any of the worry of non-payment issues.

Nonrecourse debt

For buyers, this approach to SCF can offer three important benefits:

1. A new source of savings – which can be helpful in a market where savings have tended towards zero for some time for professional buyers. And, when suppliers are likely to stick to higher prices in 2021 as they attempt to recover the losses of 2020.

2. That these returns from financiers (new savings) can be easily directed to more protected budgets like rebates going back to CFO suspense accounts to protect the new saving from getting diverted to finance other more discretionary purchases by corporate users.

3. It is a way to bring flexibility on payment terms that SME sized suppliers sometimes need, but on a flexible and as needed basis. In other words, suppliers don’t have to come begging on occasion (raising unwelcome questions and slow decision cycles by buyers), nor do they have to forfeit profitability for permanent favoured payment terms to cover occasional cash-flow eventualities.


In short, supply chain financing can be a way for buyers to help chosen SME sized suppliers – but in a way that they can add an extra benefit too. For those that do not just want to pay everything inside five days that is – or simply cannot afford to do so themselves.

There are many organisations that turnover more than $10m and are exempt from the new Act. Even amongst those that do qualify for 30 day payment, a premium for “by the day” payment choices can be compelling on occasion.

And, of course, international suppliers are a different proposition to domestic suppliers. Especially where an Australian manufacturer is exporting goods from a domestic supply chain – this can ‘squeeze’ the cash-flow on the Aussie exporter paid on 60 or 90 days, but forced to pay their domestic suppliers in 30 days. It can also nudge them towards overseas suppliers over domestic ones to get better cash terms to support their entire supply chain. SCF can help bridge these problems.

Finally, it may be worth noting that SMEs might generally prefer low risk blue-chip clients on longer payment terms, to other SMEs as higher risk customers on better payment terms – as certainty of payment is weighed -v- simply speed of payment. Simply, the facility of flexible payment terms through supply chain finance can give SMEs what they need rather than what they may be offered.

Jonathan Dutton FCIPS has a non-exec role at SUPPLY CLUSTERS and is a regular columnist. He is also a brand ambassador for PASA …

JD has also recently launched a new online Strategic Programme Leadership Programme which will run next March 2021, with further live and online courses set to run throughout the year – restrictions permitting:


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