I must admit, in the past I’ve been one to treat my parents like a bank. Sometimes it’s easy for younger people to see their parents’ wallets as a bottomless trough of cash that’s there to be taken advantage of. If it’s available, take advantage right?! Being their favourite (and only) son gave me a bit of leeway to have this attitude…
Unfortunately, that’s not how the real world operates. Most owners of businesses experiencing a cash flow drought can’t run to Mommy for an extra couple of thousand dollars to cover employee wages or a tax bill.
Navigating through the cash flow cycle
Addressing payables or receivables, cash is always moving in or out of your business. QuickBooks suggest thinking of it as a cycle:
– Receive payment
A customer pays their bill
– Manage your cash
Budgeting and/or making sure there’s enough to go around
– Make payments
Paying your bills (as soon as possible!), paying wages and tax
– Finance purchases
Forecasting how you’ll pay for future bills
– Control Inventory
Making sure you have enough resources (product, equipment) to cover future requirements
For a business to work, your accounts receivable will replace what was spent satisfying your accounts payable, and ideally provide more value to create the profits you need to start this cycle over again. That’s pretty much the lifeblood of a business, and a failure of one part of the cycle will likely produce a negative flow-on effect. So, the faster the cycle occurs, the faster you get paid. The faster you get paid, the faster you turn a profit that you can reinvest into the business.
No matter how much time you spend chasing down your debtors, there are some people that won’t pay because they’re trying to deal with their own cash flow cycle. It’s certainly not fair, but they’re battling to keep their companies afloat too.
It’s never been more prevalent than in recent times in Christchurch, New Zealand. Following the devastating earthquake in 2011, trades work has been abundant, but many businesses keep experiencing a cash flow crunch. For builders to remain afloat, they seem to be treating their subcontractors “like banks”. As reported in local newspaper The Press, smaller subcontracting companies are surviving on a week-to-week basis, as the money owed to Christchurch tradies escalates – a year-on-year increase of 29% for plumbers, 88% for painters, and a whopping 400% for bricklayers.
The problem isn’t centralised in Christchurch, nor trades. Woolworths – one of the biggest retailers in Australia – pays their bills on 60 days, and global mining corporation Rio Tinto recently proposed increasing their payment terms from 45 days to 90 days.
As Peter Strong of the Council of Small Business of Australia said, “Some of these companies are effectively using small and medium businesses as ‘banks’ – places where they get interest free loans for long periods so they can increase their profits.”
Over the last six years, the average time to pay has grown to become more than 50 days, which makes for a lengthy cash flow cycle. It’s not good for small businesses, and it’s not good for the economy either.
How prompt payment laws help small businesses
Following on from Strong’s comments, he has recommended a prompt payment protocol for Australia – a “voluntary industry standard where signatories agree to abide by the rules of the protocol and are publicly recognised for doing so”. Large businesses in particular would be encouraged as a corporate social responsibility to sign on, and pay in full “on time” – at least within 30 days of being invoiced.
This will mean a faster cash flow cycle and a higher capability for success for your business.
It isn’t a new concept – payment protocols are in place all over the globe, as agencies fight for businesses to get their cash in a good timeframe. Big businesses in the UK support a Prompt Payment code, administered by The Chartered Institute of Credit Management. The US Treasury has a prompt payment rule to ensure that valid invoices are paid on time by federal agencies. The Canadian Senate is reviewing a bill to enact the Canada Prompt Payment Act, where contractors and subcontractors involved in construction would be entitled to be paid on time.
What can you do?
It’s a bit of a shame that action is needing to be taken. Big businesses seem to be exerting their power over smaller players by holding them to ransom – with most being forced to get paid late rather than lose contracts completely.
How can you have an effect on this issue?
Enforce your payment terms as much as you can. If this doesn’t bear much fruit then here’s our advice: treat those how you want to be treated. If your cash flow cycle allows, pay your bills as soon as you can and you might get some good karma coming your way soon.
We’d love to hear your experiences with big businesses treating you like a bank. You can also voice your support for a prompt payment protocol in your area by contacting your local business agencies, like The Council of Small Business of Australia.