Trade payment data from around the world indicates global economic conditions are improving. But the data also clearly shows small businesses are funding the cash flow of larger companies. This has consequences for the global economy should credit conditions tighten. Here, we explore payment trends around the world, and the potential impact of these trends.
First, it’s important to understand Australia’s trade payment times as a benchmark. According to Dun and Bradstreet’s most recent data, the trend for faster payments stalled during the second quarter of 2016. The national average for the time it takes businesses to pay their bills is now sitting at 44.9 days. The 2015 figure was 49.2 days. It’s worth noting the second quarter of this year is the first time payment times have climbed since 2015.
As Stephen Koukoulas, economics advisor to Dun & Bradstreet noted in a statement released with these numbers, “the trade payments data are often volatile on a quarter-by-quarter basis, which means it is too early to be sure whether the slight rise in payment times is a sign of a weaker performance from the business sector or part of that volatility.”
In the first quarter of this year 68 per cent of businesses settled their invoices within one to 30 days, with 24 per cent of businesses paying bills between 31 and 60days, up from 21 per cent last year.
This rise in payment times was consistent across the country, the Northern Territory being the only exception, with payment terms dropping from 42.5 days in the first quarter to 43.3 days in the second quarter. The ACT is the worst of all the states, with average payment times of 50.4 days. Businesses in Tasmania are the best payers, with 41.8 days being the average payment time.
From a sector perspective, businesses in the communications and mining sector increased payment times, with the average payment times for companies in the communications sector now 56.4 days, up from 49.9 days in the first quarter.
Businesses in the finance, insurance and real estate industries achieved the biggest improvement in payment times, dropping seven days from 53.1 days to 46.1 days in the second quarter.
Veda collects information on payment terms or on accounts receivable data from its data suppliers. According to its figures, as at June the days beyond terms, on average, were 11.8 days.
Damien Stevens, Veda senior product manager, commercial risk, says this figure, "has been fairly consistent over the last 12 months. The average for the last 12 months is 11.6. We do see a difference depending on the size of the organisation and industry. If you have a look at larger organisations that have more than 100 employees, as an example, their days beyond terms for June were 16.7 days compared to the average of 11.8."
Kiwi trends mirror Australia
Across the Tasman payment data reflects similar trends to Australia's figures. Like Australia, New Zealand has experienced a marginal rise in payment times, but overall, payment data remains well below average.
Average payment times have remained at about 35 days for the last four quarters. Dun & Bradstreet's numbers show New Zealand businesses took 35.5 days on average to pay their invoices during the second quarter of the year, up from 35.2 days during the first three months of 2016.
The second quarter 2016 Trade Payments Index was 0.5 days higher compared with the same period last year. But the figure is still substantially lower than the 10-year average of 42.6 days.
Kevin De Beer, managing director for Dun & Bradstreet New Zealand, said in a statement payment data reflects the underlying strength of New Zealand businesses' cash flow.
"This strong result is in line with expectations internally and continues the stable trajectory of historically low payment times observed over the last year. While this result pre-dates the Brexit referendum, we are simply not observing that the economic uncertainty pervading markets at a global level is impacting business cash flows domestically."
"With continued low interest rates, a stable New Zealand dollar and barring significant global economic shocks, invoice payment times should remain at similar levels for the medium term," added De Beer.
Businesses in the agriculture, fishing and communications sectors improved their payment times on average, which reduced payment times by almost four days over the second quarter. But businesses in the manufacturing, wholesale and retail sectors took longer to pay (by 2.2 days, 2.5 days and 2.4 days respectively) compared with the previous quarter.
Brexit fallout could still be felt
While it's not possible to compare like-for-like figures across countries from Dun & Bradstreet's figures, individual country data does paint a picture of payment trends around the world.
Its data shows 24.1 per cent of British companies pay their bills on time. This compared to the average European figure of 37.5 per cent. Most British companies (64.7 per cent) pay on average between one and 30 days late.
Micro companies are the best payers, while only 7.9 per cent of large companies pay their invoices by the due date. On an industry basis the best payers are agriculture, forestry, hunting and fishing. The worst payers are retail trade.
Philip King, chief executive of the UK Chartered Institute of Credit Management, notes there are considerable differences by sector and region, with average businesses paying around 20 days beyond terms.
"There has been some improvement in this position in recent times, especially since fighting late payment has been a political vote winner and the government has committed to paying 80 per cent of its suppliers within five days," he explains.
King says the consequences of late payment are considerable: it impacts investment, recruitment and stifles growth. "Conversely, improving payment performance delivers greater confidence and availability of cash which leads to growth and a more stable economy. Critically, it helps to create a more sustainable small business community, which is the engine for growth."
Late payment is, however, becoming a serious issue across Europe. According to Intrum Justitia's 2016 European Payments Report, which draws on data from 9440 businesses, 33 per cent of respondents see late payments as a threat to their survival. Twenty-five per cent say they are likely to dismiss staff if clients pay late or not at all.
Reflecting global trends, European small businesses report large clients are squeezing them. The report notes, "as many as 43 per cent of SMEs say that have been asked to accept longer payment terms than they are comfortable with and 39 per cent of those ... claim that the request came from a large multinational client."
Looking at the rest of the world, Europe and the UK lag the US, where Dun & Bradstreet's data shows 53.8 per cent of companies pay by the due date. But reflecting the international trend, micro payers are the best at paying their bills on time in the US, with only 13 per cent of all large companies paying invoices by their due date.
In Asia, some of the best paying businesses are in Singapore, according to Dun & Bradstreet, where 53.1 per cent of businesses pay on time. There is no data available for size of business. In China, 33.2 per cent of businesses pay on time, with 37 per cent of small companies paying on time and 28 per cent of large companies paying on time.
While there is some evidence economic conditions around the world are stabilising, there is no doubt international markets remain fragile. The health of the commercial credit sector is essential for supporting economic growth, and more needs to be done to encourage businesses to pay their bills on time, especially big businesses.
According to Dr John Hewson, chair of GSA Insurance Brokers, economic conditions start to deteriorate as businesses delay payments. "As this process increases, economic conditions continue to decline," he says.
Nevertheless, Dr Hewson says reforms introduced by the Australian Competition and Consumer Commission such as the 'effects test', should help reduce incidences of larger businesses delaying payments to smaller firms.
"Payment terms are a barometer for economic conditions. If they are rising, the economy will slow down, irrespective of GDP, and over time poor payment data will be reflected in growth numbers," he adds.
Patrick Crivelli, a director of Skippr, a cash flow management fintech, takes this argument one step further.
"When your customer makes you wait for invoice payments you are now in the business of making interest free loans. There are a number of reasons why this situation is bad for business. It impacts your ability to grow, results in hidden costs through chasing payments, it creates loss of sleep over cash flow worries, and most importantly it negatively impacts business valuations," he says.
One way around this, says Crivelli, is to find overseas clients who pay more quickly. "China in particular has an insatiable appetite for many Australian-produced goods. Our research shows many Chinese buyers are willing to pay for merchandise before it has even left Australia. Some Chinese buyers will pay a percentage of the merchandise value upfront, before the goods have even been produced."
While it's too early to tell whether the slight deterioration in payment times in the second quarter of the year is a sign of worsening economic conditions, more needs to be done to shorten payment times generally across the economy to help release cash for growth opportunities and to help support the economy into the future.