A new Bill is currently being passed through Parliament known as the Payment Times Reporting Bill 2020. The Bill, which is intended to come into effect from 1 January 2021, imposes requirements on large businesses to publish information on how quickly they pay small and family businesses. Proponents of the Bill believe that this is an important step to encourage fairer and faster payments.
The increased transparency around payment times has the potential to significantly impact the working capital position of large and small businesses, with research showing that $77 billion (or c.27%) of payments from large to small businesses were paid 63 days late on average in 2017-18, resulting in a $7 billion working capital impact.
The overall goal of the new legislation is to improve payment outcomes for Australian small businesses by:
- increasing the level of information collected on the payment practices of large businesses and government agencies;
- making information about payment practices visible and easily accessible to small businesses and other interested parties; and
- ensuring the compliance and administrative responsibilities of large businesses is appropriate and able to be reasonably managed.
While the details of legislation are still to be agreed and ratified by parliament, recent Senate guidance suggests that it will come into effect and so we have set out below some commentary on the likely impacts and suggestions for how businesses can prepare for the new legislation.
What are the impacts?
The onus to report is on large businesses (>$100 million turnover). They will need to report biannually on their payment terms and practices for their small business suppliers. ‘Small’ businesses are defined as those that have an annual total income of $10 million or less.
Reporting will cover both standard payment terms (i.e. how quickly large businesses say they will pay their small business suppliers) and actual payment performance (i.e. how quickly large businesses actually pay their small business suppliers). In addition, large businesses will need to report on whether and how much they use supply chain financing arrangements (where small business suppliers may have the option to be paid quicker if they accept a reduced payment).
Businesses that do not comply are at risk of incurring financial penalties, reputational impacts and additional compliance costs.
Small Businesses (turnover <$10 million turnover) do not have any obligations under the proposed legislation. A lookup service will be established that will allow businesses to search a database for their suppliers to identify any small business suppliers. The lookup service will be based on a ‘negative screen’ of small businesses (i.e. if the supplier is not identified through the lookup, then it is a small business by default).
The legislation does not impose specified terms or a specified number of days to pay small business suppliers. The intention of the increased reporting is to publicise payment behaviour (that can be comparable across industries or subsets of businesses) and encourage those large businesses to pay small businesses within 30 days.
The increased transparency around the terms offered and average payment timeliness reported by large businesses is expected to provide a number of benefits, including:
- providing an opportunity for large businesses to generate goodwill through good payment data on the public register;
- providing information for small businesses to benchmark payment performance and make informed decisions about who they engage with and on what terms;
- encouraging large businesses to shorten payment terms to 30 days and to ensure timely payments to small businesses, transferring a material working capital benefit to small businesses;
- improving cash flow for small businesses, reducing funding costs and creating opportunity for investment in new initiatives and growth; and
- providing a public registry of information to assist with managing counterparty risk more generally, including obtaining data to assist with customer credit checks.
Poor payment practices may be the result of governance and process issues within an organisation, or may also indicate unfavourable collection terms with its own customers (i.e. slow collections being passed onto suppliers by way of slow payments). By increasing information flow around payment practices there is an opportunity for both large and small businesses to re-evaluate their working capital performance and look for opportunities to shorten their cycles.
What can you do to prepare?
Businesses can take steps now to prepare and ensure they are positioned to present favourably on the register, including:
- reviewing and verifying the suppliers that they will need to report on;
- reviewing availability and quality of information that will be required to be reported to the Regulator;
- reviewing and stratifying supplier payment terms and average timeliness of payments to understand if there are any material issues to resolve prior to reporting commencing;
- assessing the potential working capital, cash flow and funding impacts that changes in payment terms may create;
- developing and implementing a robust plan to offset the impact through other working capital ‘levers’ that can best optimise the working capital position; and
- reviewing the procedural framework, governance and controls related to procurement, accounts payable, supplier management and reporting, and reset any policies and processes as necessary.
With the likelihood that the legislation will be enacted into law and the new reporting requirements will go ‘live’ on 1 January 2021, we encourage businesses to act now.
Further detail is provided on the attached McGrathNicol Advisory fact sheet.