28 October 2009

Australian firms are hurting each other and setting themselves up to be locked out of the credit market or to face action from the tax office as a result of the way they are prioritising payments.

A new study released today by Dun & Bradstreet (D&B) reveals that 66 percent of firms are prepared to miss supplier payments if they are unable to pay all their accounts and a further 15 percent are prepared to a miss a tax payment. Yet failing to pay these bills could leave Australian firms unable to access credit and facing penalties from the tax department as financial institutions refuse loans to firms holding a tax debt and credit providers continue their stringent focus on trade reference checks as part of the credit assessment process.

The study also reveals that many firms are unaware of the implications of paying late on their ability to access credit, with close to two thirds indicating that if they knew late payments would detrimentally impact their credit standing they would be more likely to pay on time.

Prioritising payments - bills that Australian firms are least likely to pay

The study's findings follow D&B's latest trade payments data which reveals that Australian firms averaged 51.8 days to settle accounts in the September quarter 2009 and with 43 percent of executives already indicating they are being detrimentally impacted by lagging business-to-business payments.

Coming on the back of these results, the Business Payment Priorities Study provides clear evidence that cash flow pressures remain prevalent, despite signs that Australia is on the path to recovery, and that Australian firms are hurting each other with their payment behaviours. Fifty one percent of firms admitted to having paid their bills late in the past 12 months, with one in four paying in a severely delinquent manner (60+ days past due). Cash flow issues (13 percent) and customers paying late (18 percent) were two of the key reasons executives provided for their own poor payment behaviours.

According to Christine Christian, CEO of Dun & Bradstreet, Australian firms' are hurting each other and themselves.

"Cash is absolutely critical to business survival and prosperity in an economic recovery," said Ms Christian.  

"However, the payment habits of Australian firms are making cash flow management increasingly difficult. More than half of firms admit to paying their bills late, and one in four are paying in a severely delinquent manner. Consequently, the cash flow of Australian firms is coming under increased pressure despite improving economic conditions.

"On top of this, firms are indicating they would be willing to miss payments to their suppliers, the very payments that are recorded on their credit file and assessed by lenders when they apply for funds. This means they could find themselves unable to access credit as financial institutions continue their vigilant focus on risk management."

The Payment Priorities Study revealed that 61 percent of firms would be more likely to pay their bills on time if they knew late payments were being listed with a credit reporting bureau and could worsen their credit standing. Conversely, the listing of early payments with a bureau (improving the credit standing of firms) would make 29 percent of firms more likely to pay promptly.

The impact of listing payments with a credit bureau differs by business size. Sixty seven percent of firms with 51-100 employees indicated that a late payment listing would make them more likely to pay their bills on time, while 55 percent of firms with 100-499 employees indicated this action would change their behaviour. Conversely, just eight percent of firms with 500+ employees said that the listing of early payments would make them more likely to pay their bills on time. This figure doubled for firms with 100-499 employees and rose above 30 percent for smaller firms.

Listing payments with a credit reporting bureau

"The study's findings demonstrate that many firms are unaware their payment records are being listed with a credit bureau or they don't fully understand the consequences of their payment behaviours," said Ms Christian.

"More than nine million trade references are recorded on the D&B bureau, which means the likelihood that a credit provider is unaware of a firm's poor payment behaviour is very low."

The study revealed a number of ways in which Australian firms can influence the payment behaviours of their customers and ultimately improve their cash position. The first is dealing appropriately with administrative issues. Twenty three percent of firms indicated that the purchase order number had not been quoted on their invoice, a further 20 percent indicated they hadn't been contacted about the bill, 12 percent said the bill had been sent to the wrong address and 3.5 percent said they hadn't been followed up once the bill became overdue.

"In this environment, firms cannot afford to give their customers excuses to pay their bills late. Otherwise, administrative issues which are relatively simple to rectify will continue to detrimentally impact business cash flow," said Ms Christian.

Contact by a debt collector was another motivator for on-time payment, with almost half (47 percent) of firms indicating they'd be more likely to pay on time if they were contacted by a collections firm. Smaller firms are most likely to respond to collections activity, with 13 percentage points separating the impact on larger firms as compared to those with less than 100 staff.

The Business Payment Priorities Study follows further D&B research which shows that firms are particularly susceptible to risk during an economic recovery. In the financial year that followed the Dot Com Bust of 2000, Australia experienced a 20.5 percent increase in bankruptcies, despite positive economic growth being recorded. In addition, the latest risk rating reveal that close to 38,000 Australian firms are rated a high risk of experiencing distress this financial year, following a continued increase in the number of high risk firms since the June quarter 2008.

"It is evident that Australian firms will continue to face challenges as the economic recovery unfolds," said Ms Christian.

"In this environment, survival and prosperity are dependent on firms maintaining a strong focus on the fundamentals of cash flow management and implementing the right strategies to ensure that customers pay promptly. Failing to do so will only result in poor cash flow and in more extreme cases, could see firms end up as another statistic on the failed business register."