The recent findings from a CreditorWatch survey shed light on a significant challenge faced by Australian businesses, with over 80% of respondents reporting the detrimental impact of late payments on their growth trajectory in the last six months.
The study underscores the pervasive issue, emphasizing that a substantial 37% of businesses have become accustomed to enduring extended waits of 60 days or more for payment, exacerbating financial strains and hindering overall business development. To navigate these challenges, businesses are adopting various strategies to mitigate the impact of late payments.
The predominant approach to mitigating exposure to late payments follows the 62-43-37 rule, as indicated by recent survey findings:
Automated Reminders (62): The majority of businesses leverage automated reminder systems, constituting 62% of respondents. This proactive method involves employing technology to send timely reminders to clients and partners, fostering efficient communication and encouraging timely payments. We believe this should be your first step. Example: A small consulting firm implements an automated invoicing system that sends gentle yet persistent reminders to clients as payment deadlines approach. These automated messages include polite prompts and details about the outstanding invoice, facilitating timely payments without straining client relationships.
Automatic Alerts for Credit Risk Changes (43): Nearly half of the surveyed businesses, accounting for 43%, employ automatic alert systems. These tools notify organizations when there are changes in their clients’ credit risk, enabling informed decision-making and allowing for timely adjustments in response to evolving financial conditions. Example: A medium-sized company subscribes to a credit monitoring service that automatically alerts them when significant changes in their key clients’ credit risk profile exist. This allows the company to proactively assess potential risks and adjust its financial strategies accordingly, mitigating the impact of late payments on its own cash flow.
Adjusting Terms and Conditions (37): The final step can be to amend the terms to your advantage. A significant portion of businesses, representing 37%, opt for adjusting terms and conditions as a strategic response to late payments. This involves revisiting and modifying contractual agreements, potentially renegotiating payment terms and implementing clearer expectations to create a more sustainable payment environment. Example: A software development agency revisits its standard contract terms and conditions to address late payment concerns. The agency modifies the payment schedule to include incremental payments tied to project milestones, creating a more balanced cash flow and reducing the risk of extended delays. Clearer language regarding late payment penalties is also added to set expectations and discourage tardiness.
Payment defaults, a key indicator of potential business insolvency, have revealed a median overdue period of 170 days. This substantial delay not only poses immediate financial challenges but also serves as a harbinger of future troubles, with a 24% likelihood of business failure within the next year for enterprises with a single default. The stakes escalate significantly to a daunting 62% when a business accumulates three or more defaults.
Compounding these financial hurdles is the holiday period, during which Australian businesses grapple with an average 20% drop in revenue. This decline is exacerbated by the traditional closure of numerous businesses during this time, further amplifying the likelihood of encountering late payments.
Beyond the financial strain, Australian businesses are also contending with power imbalances during contract negotiations. A striking two-thirds of businesses (66%) express feeling at a disadvantage when negotiating with larger counterparts, shedding light on the challenges smaller entities face in maintaining equitable business relationships.
In the realm of late payments, the creativity displayed in providing excuses is noteworthy. From claims of temporary amnesia induced by a head injury to unexpected detours to grand finals and even misplaced wallets in unconventional places, businesses seem to have no shortage of inventive reasons for delayed payments.
CreditorWatch’s CEO, Patrick Coghlan, emphasizes the disproportionate impact of late payments on small businesses, noting that their late payment rates are three times higher on average compared to their larger counterparts. Operating on narrower profit margins, small businesses find themselves particularly vulnerable to the financial strain caused by delayed payments.
“Late payment rates for small business are, on average, three times greater compared to large businesses, which is a huge problem considering they are operating on much tighter margins,” he says. “With the incidence of late payments and payment defaults increasing over the Christmas, New Year period, businesses should be taking proactive measures to follow up on outstanding invoices before the break.”
CreditorWatch’s ‘Late Payments’ Guide is now available in full here.