The Payment Times Reporting Bill came into effect in Australia on 1 January 2021. This legislation requires large businesses and government entities with revenues over $100 million per annum to report bi-annually on their payment terms to small businesses, which are classified as enterprises with less than $10 million annual turnover.
This information will be publicly available, providing suppliers greater insight into the payment practices of prospective customers. This enables them to make a more informed decision as to whether it’s commercially viable for them to trade with a particular entity.
It also means that it becomes essential for large businesses to address their long payment terms and late invoice payments. The Payment Times Reports Registrar will expose entities with sub-standard accounts payable performance. This presents the risk of reputational damage to businesses, as well as the prospect of losing quality suppliers to competitors that have shorter payment terms.
What’s the issue with late payments?
Late invoice payment is a perpetual problem for small and medium-sized enterprises (SMEs) and, in fact, for the broader economy.
In 2017 the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) released the findings of their Inquiry into Payment Times and Practices in Australia and called for legislation to regulate payment times to small businesses.
ASBFEO found that almost half of small and medium sized businesses were owed more than $20,000 in late payments and 14% of businesses had over $100,000 owed to them. Further research on this issue in 2019 by economic consultants AlphaBeta found:
- Every year $115 billion worth of payments from large companies to SMEs are late
- On average, these invoices are 23 days late
- Large businesses pay an estimated 53% of SME invoices late
- Long and late payments equate to $7 billion in working capital withheld from small business every year.
Long payment terms and late payments have the effect of small businesses inadvertently providing a line of credit to large businesses. Unfortunately, they also wear the consequences of it: lack of cash flow is a leading cause of business insolvency.
Many small businesses have limited cash flow reserves and rely on payments to meet their expenses. Therefore, there is a knock-on effect with late payments: SMEs also become less able to pay their suppliers on time, slowing the circulation of money in the economy and impeding its growth.
Small business ombudsman Kate Carnell says that shortening payment times significantly boosts the economy by creating jobs and lifting wages. While the new reporting scheme does not mandate acceptable payment times, a payment record greater than 30 days will likely be damaging for companies.
Such a payment track record may suggest weak internal processes and controls, sub-standard governance, and poor corporate citizenship, which are factors that could impact negatively upon the company’s share price. Certainly, with payment times available to the media as well as to customers and suppliers, reputational brand damage is a significant risk.
What does Payment Times Reporting mean for large businesses?
Large entities and government enterprises will have to get across these new requirements quickly. After a 12-month transition period, the penalties for non-compliance or for providing misleading information are steep:
- 0.2% of annual income for failing to report
- 0.2% of annual income for failing to comply with an auditor appointed by a Regulator
- 0.6% of annual income for providing misleading information
Consequently, reporting entities have two key priorities:
- Firstly, to make the operational and/or system changes required to collect data and report on payments to suppliers identified as small businesses; and
- Secondly, to automate accounts payable and/or transition to PEPPOL e-Invoicing to significantly reduce invoice processing times and gain visibility and control over payments.
Why do large businesses often pay
For many large businesses, payments are made late because companies have not fully automated their procure–to–pay processes and still rely on manually entering data into their finance systems. As a result, mistakes such as typos are commonplace, which lead to exceptions and re-work finding and correcting these errors. This slows the invoice approval process.
Research shows that 20-30% of all paper-based invoices need to be treated as exceptions. Frequently, the cause of invoice discrepancies is simply human error. With automation significantly more accurate and quicker than manual processing, this helps to bring the rate of exceptions down and achieve greater throughput and a more streamlined workflow.
A problem for many large businesses is that they have an extremely complex business structure, which slows the approval process. There can be a question about where an invoice has come from and what it relates to, as well as ambiguity about who is responsible for approving it. Further, an invoice may need several GL codes and approvals relating to different line items, slowing its approval.
Automation ensures efficiency and compliance
With automation the invoice approval process is mapped, and the roles and responsibilities of key people are identified and clearly defined. Business rules are applied to navigate the invoices through the workflow via the routes they require for approvals, coding and exception management. Visibility across the invoice lifecycle means staff members are held accountable for their approval tasks as well as any delays on their part.
As a result, invoice payment times are considerably shorter. Moreover, the efficiency gains actually help lower the rate of exceptions. Research by Ardent Partners in 2020 found that companies with a complete procure-to-pay solution have a 57% lower invoice exception rate than companies that manually process.
While some of this is attributable to more accurate data through use of Optical Character Recognition (OCR) technology, automation also provides increased visibility into company spend and supplier practices. This additional insight allows accounts payable to proactively address and reduce their exceptions.
An opportunity to transform accounts payable
Payment Times Reporting presents a regulatory cost to businesses in terms of management time and effort, as well as potentially new systems and processes to collect and report on payment times to specific suppliers.
However, it also offers a significant opportunity to use automation and/or PEPPOL e-Invoicing to bring down invoice processing times and, consequently, costs. Automating accounts payable delivers organisations immediate and ongoing savings through:
- Significantly less human intervention
- A higher rate of straight-through processing
- No more duplicate payments made
- No more late fees accrued
- No more fraudulent invoices paid
In addition to providing a better supplier and staff experience, automation can benefit brand perception more broadly; indeed, being seen to do the right thing by vendors through the Payment Times Register may attract the attention and interests of investors as well as new customers.
Automation solutions also pave the way for a more strategic role for accounts payable. The role of the business unit becomes more about providing spend analysis and other data insights to the wider enterprise, as well as managing supplier relationships and generating further savings for the business.
With an impeccable record of on-time payment and visibility across all invoices inflight and paid, accounts payable may be able to help optimise working capital by:
- Identifying where money can be saved
- Advising on which suppliers should be retained
- Negotiating more favourable terms with suppliers (lower prices, volume discounts and more)
Consequently, although there will be cost incurred rolling out Payment Times Reporting, there will also be savings from getting a true handle on company spending practices and reducing long and inefficient payment terms.
With the help of automation technology, the accounts payable department may be able to return additional savings to the business. This will ultimately help to drive profitability, leading to better outcomes for all stakeholders.