A recent study published by accounting software company Xero revealed that SMEs lose up to $7 billion every year because larger companies fail to pay their invoices on time. This puts the value of outstanding invoices to a whopping $115 billion per year.
These findings are based on Xero’s review of over 10 million invoices issued by more than 150,000 small and medium-sized businesses throughout Australia. The researchers discovered that large businesses pay 53 percent of invoices from SMEs late by an average of 23 days.
The Financial Domino Effect
To big companies, 23 days might just be a small blip in the radar. But for small businesses and start-ups, this period makes a huge difference. Late payments prevent them from paying their own bills to suppliers and contractors. They also keep SMEs from hiring new staff and taking risks that would allow them to grow. This creates a financial domino effect that threatens the country’s economy as a whole.
Carolyn Stebbing, one of the SME owners interviewed in the Xero study, told the researchers what late payments meant for her business.
“What clients don’t think about is when they pay late, it can affect dozens of other businesses–printers, film companies, contractors–who depend on small businesses like mine for their livelihood,” said Ms. Stebbing.
Ms. Stebbing owns Little Village Creative, an advertising firm based in Melbourne. She said that to compensate for late payments, she has no choice but to maintain a cash buffer. Without it, her business would be brought to a standstill.
Ms. Stebbing is lucky in this respect, as she is able to put together a cash buffer. Unfortunately, not all small business owners have access to additional resources that allow for this kind of safety net.
This is why it comes as no surprise that the Xero report discovered a link between long payment times and slower growth for small businesses, with 46 percent of SMEs failing in the first five years.
Changing the Culture of Late Payments
The staggering number presented by report has created a sense of urgency to implement measure that will finally change this culture of late payments.
Trent Innes, Xero’s chief executive, called on big businesses and the government to focus on this issue.
“In a period of soft economic growth, encouraging large businesses to pay on time should be a priority for the new Parliament,” said Mr. Innes.
He also advised SMEs to be more proactive when dealing with late payments. He suggested establishing shorter payment terms and to offer varied payment options.
For more tips on how to prevent late payments, check out these articles:
- The Secrets to Streamlining the Business Invoicing Process
- How to Spot Clients Who Won’t Pay: Tips for Business Owners
- 9 Must-Haves of an Invoice That Gets Paid on Time
To access the complete Xero report, click here.