Payment Times Reporting Scheme (PTRS)
What is the PTRS?
The PTRS requires businesses with turnover >$100 million to report biannually on payment times and practices for small business suppliers (<$10 million turnover). The data will be made publicly available with the aim of providing greater visibility on payment behaviours to encourage larger businesses to pay small businesses more quickly. The PTRS went live in January 2021 with the first reporting period covering the six months to 30 June 2021.
Has the PTRS made a difference to payment behaviours?
Interestingly, whilst average supplier payment cycles got longer in 2021 (average DPO up 1.9 days), six of the seven sectors and 60% of companies sampled paid suppliers more quickly in H2 (the first PTRS reporting period) than in H1. This suggests that the PTRS has had an impact, although the magnitude of it is difficult to measure with accuracy as operators across most sectors also had to accelerate supplier payments in H2 to shore up supply to meet increased customer demand. We expect that closer attention will be paid to complying with PTRS obligations as enforcement measures come into effect in January 2022.
Supply chain financing
Is supply chain financing a good thing?
Supply chain financing can benefit customers and suppliers if used responsibly. Despite the collapse of Greensill Capital earlier in the year, we are seeing an increasing number of supply chain financiers enter the market. They offer facilities that can be attractive to operators as they are often “security light” and have limits that flex with the level of trading activity and seasonal funding requirements. When used well, facilities help bridge the “funding gaps” that some businesses have to manage (where suppliers need to be paid in advance of sales being converted into customer collections). Retailers, Wholesalers, and Construction businesses are common users.
What are the common pitfalls?
We see an over-reliance on supply chain financing as a risk. In our opinion, the facilities should be considered once a business has managed its working capital cycle well such that the need for the facility is clear, the sizing is appropriate and the benefits are additive. In our experience, supply chain finance won’t solve issues associated with poor working capital management. In fact, it can often exacerbate these issues as access to financing typically decreases after an initial “sugar hit” if ageing of receivables creeps out beyond 60 or 90 days.
What should management teams do to get the most out of supply chain financing?
Management teams should do the groundwork first to optimise the working capital cycles of their businesses, putting in place processes and protocols to drive responsibility and accountability for delivering against target working capital metrics. This will help provide clarity in terms of any residual “funding gap” that may need financing.
Watch the gap!
What does the difference between good and bad look like?
The DWC spread between the ‘best’ and ‘worst’ performers in 2021 was greater than 100 days in five of the seven sectors, and greater than 200 days in three of those sectors (being Agriculture, Retail and Food & Beverage). Interestingly, across each of the elements of working capital, the spread got wider during H2, signalling the challenges faced by businesses as trading conditions changed after the first wave of COVID.
Why is working capital management important?
There was clearly a mix of results at the company level with some operators holding an additional three to six months of cash in working capital than their peers. It highlights that a material competitive advantage can be achieved by implementing best practice, and that this advantage is magnified in times of volatility and disruption.
Looking ahead to 2022
What’s on the horizon for Australian business?
Continued easing of travel and other restrictions is likely to promote an uplift in trading activity across most sectors in 2022. However, a key challenge for businesses will be managing working capital effectively so that they are set up to take advantage of the growth opportunities. Australia is emerging from the second wave of COVID later than other western economies. The demand from Europe and the US is placing strain on supply chains that had not fully recovered. Operators in these regions are also paying more for supply, increasing costs across the supply chain, which are not just contained to the well-publicised shipping price rises.
The early signs of a working capital “crunch” came through in H2 2021, where companies in the Building Products, Construction & Engineering and Food & Beverage sectors experienced reduced inventory loads as the supply chain constraints began to materialise. Our international benchmarking shows that Australian businesses typically hold close 1.4x the inventory of their US, EU, and Asian counterparts. They may not be afforded the same luxury in 2022.
What should Australian businesses be doing in response?
Managing working capital will be harder in 2022 so it needs to be given the appropriate level of airtime with senior management and the Board, in the same way that strategy and safety are key pillars of any successful business. Management teams need to focus on strong S&OP processes, integrated forecasting, and real options to diversify supply (including domestic sourcing and manufacturing). Businesses that establish working groups dedicated to cash and working capital management and implement effective processes are more likely to get it right.