In the second part of our series on cash flow management, Mark Beyer looks at trends in trade payments.
ONE of the key strategies businesses looking to improve their cash flow can employ is to speed up payments by trade debtors.
A good starting point for each business is to ascertain the standard payment period for their industry, to determine whether or not they are being paid late.
Research by Dun & Bradstreet has found that the average trade payment period for Australia is 56 days.
This is well down from a peak of 66 days in July 2000, when businesses delayed paying their creditors to conserve cash and ensure they could meet quarterly tax deadlines.
Since then, businesses have progressively tightened their standard payment terms.
D&B managing director for Australia and New Zealand, Christine Christian, said the number of companies with payment terms over 30 days had shrunk from 25 per cent to just 4 per cent.
The Australian average disguises substantial variations across sectors.
D&B found that average payment terms ranged from 63 days for the mining industry through to 51 days for transport and communication.
It also found that small business gets harsher treatment than large firms.
“When we trawled through the database for businesses with less than 20 employees, it took far longer for them to get paid than larger companies,” Ms Christian said.
The difference was 11 days, with large firms getting paid in 55 days and small firms getting paid in 66 days.
“When we spoke to the small businesses, they all said the same thing,” Ms Christian said.
“They felt they were at the end of the food chain.
“Small businesses also felt very intimated. They felt it was very difficult to negotiate faster payment with their major customers.”
Ms Christian recommended that small businesses should be more assertive to ensure they receive timely payments.
Specific suggestions include clearly specifying the required payment terms when dealing with a customer.
She also urged small businesses to ensure they contact debtors to remind them about late payments.
“If you say you are going to call people after 28 days, then make sure you do it,” she said.
“The older the debt, the more difficult it is to collect.”
Another specific tactic that can be used to improve debtor payments is to profile customers based on their ability to pay.
Lincoln Indicators surveyed a sample of Australia’s top 500 companies to get more information on credit management procedures.
It found that a majority of businesses (60 per cent) do not profile their debtors.
Exceptions were the transport and manufacturing sectors, which were more likely to profile debtors, usually by using credit reference checks.