Please pay now – the politics of payment terms

By Tim Griffiths, Managing Director, Critical Input.

In business, invoice payment terms are a critical component of our supply chains and the commercial model under which we operate.

Payment terms within the Australasian market differ, but the overwhelming average is 30 days from invoice.

It’s a reasonable term and one most companies, including small businesses, can work with.

Obviously, better terms are always welcome and can even generate a rate or unit discounts or speedier delivery.

Trend toward speedy payment

 In the current economic climate, we’re witnessing many large private and public sector entities drastically reduce their payment terms to seven days or immediate upon invoice.

This gesture is extremely helpful and beneficial to small businesses and shows respect for the business community and how SMEs may be struggling with cash flow during these uncertain Covid-19 times.

 But (and there’s always a but), we’re seeing some organisations taking advantage of the situation and requesting longer payment terms – 30 days from month end, 45 days, 45 days month end, etc.

To significantly change payment terms during uncertain economic times is somewhat arrogant and shows a lack of understanding of how small businesses operate and the way cash flows impact them.

The problem of late payments to small businesses became part of a discussion in Australian politics a few years back when policymakers in Canberra called on lawmakers to mandate 30-day maximum payment times for business-to-business sales.

A question of ethics

Social commentator Bernard Salt sees late payment as an ethical issue. In 2018, he called for “same day pay” in a column in The Australian newspaper, arguing that companies should not be buying products and services if they can’t immediately pay for them.

“There are 1.5 million small businesses in Australia,” he said. “If you add in their partners, and staff and kids, then you are probably looking at four to five million people in Australia that are affected by timelines or otherwise of small business payments.

“The best thing you can do for small business is to pay promptly, on the day, same day pay. If you can’t pay for it, don’t buy the good or service.

“Refusing to pay in a timely and reasonable and fair manner is the equivalent of theft. I just cannot understand where people believe it is good or smart business practise. People might think it is smart, I think it is smarmy. If you incur a debt, you pay it and pay it promptly.”

Jeopardising supply chain

He makes a valid point. Slow or late payment puts strain not only on small cashflows, but also on relationships.

It can slow down production, reduce supply chain capability and reliability and erode goodwill. It could mean that next time there’s a supply chain shortage of a certain item, you miss out and instead the small business prioritises the customer who always promptly pays.

Delayed payment is actually quite dodgy when you think about it.

People remember how companies behave in a crisis

In an era where workplaces are becoming increasingly agile and external companies are functioning as extensions of in-house teams, it’s crucial that payment terms are fair and considerate.

It’s unlikely your employees would be okay with uncertain wages and timeframes, so why would you expect suppliers to wear that treatment?

People remember how companies behave during a crisis and these behaviours can have long-lasting impacts on future supply chains as well as reputations.

Do the right thing. Pay that invoice. Now would be a good time, but within the fair timeframe is also acceptable.