Payment times reporting: How the latest review will impact small business payments

Dr Craig Emerson, pictured here in 2019

Between 2019 and 2023, the survival rate for Australian small businesses plummeted. Half of those opened in 2019 had closed by June 2023, according to the ABC’s examination of data from the Australian Bureau of Statistics (ABS). And, in the year to August 2023, more than 15% of all businesses shut down, bringing the annual failure rate to its highest since the global financial crisis of 2008. 

These closures are the result of many factors – from the direct impact of COVID-19, when lockdowns devastated trade overnight, to its aftermath, when it became clear that some businesses had only been viable with government support. More recently, high inflation, rising rents and increased energy prices have intensified financial stress.

But one ongoing difficulty for small businesses is ensuring that they are paid on time. In January 2021, the Federal Government, then under Prime Minister Scott Morrison, responded to this challenge with the Payment Times Reporting Scheme (PTRS), which aims to incentivise big businesses to pay up.

However, a recent independent review, led by Dr Craig Emerson with the support of the Treasury, found the scheme wasn’t working well enough – and made several recommendations to improve it. The Federal Government, now under Prime Minister Anthony Albanese, has promised to implement all of them, to the tune of $8.1 million.

Why payment times matter 

Small business accountants know that cash flow is make or break. 

“A study by Intuit (owner of QuickBooks) found that 61% of small businesses struggle with cash flow, and late payments contribute significantly,” OptiPay CEO Angus Sedgwick says.

Liam Telford, National Tax Technical Director, RSM Australia believes small businesses are disproportionately affected by late payments.

“[They] tend to be more credit-constrained and subject to less favourable credit terms, [which] can affect [their] ability to pay their staff and suppliers, and remain operational,” he says.

Bigger businesses, meanwhile, can use their greater clout to delay payments to their suppliers.

“Historically, whenever cash flow becomes tight, large businesses use extended payment terms to increase cash flow and shift the working capital burden down the supply chain,”  McGrathNicol Advisory director Suzanne Westney explains.

What is the PTRS? 

Implemented on 1 January 2021, the PTRS aims to encourage big businesses to pay small businesses more promptly. It requires businesses with a turnover of more than $100 million to report on payment terms and practices when dealing with businesses that turn over less than $10 million.

“By regulating the public disclosure of payment practices, the scheme was introduced to invite greater public scrutiny, reduce the effects of unequal bargaining power and encourage small businesses to do their research,” Westney says.

The PTRS review: Why it happened, what it found and what it recommended

An independent review was required by 30 June 2024, under the Payment Times Reporting Act 2020, which created the PTRS. The review delivered its report on 31 August 2023. 

It found that the percentage of invoices paid within 30 days had only increased incrementally under the PTRS – from 62.9% to 67.6%. The percentage of invoices paid after 60 days had fallen by just one percentage point, from 8.7% to 7.7%.

In addition, the review made 14 recommendations, which fall roughly into three categories. 

First, the review calls for increased pressure on big businesses, by publishing the names of the worst and best payers.

“To date, the PTRS has provided little incentive for reporting entities to improve their payment terms and times, since there have been no consequences,” Telford says.

“[But this aims to] increase public scrutiny […] to make payment times front-of-mind for boards, CEOs and CFOs, and effect the requisite cultural change.” 

Further, the review recommends stricter discipline. This would give more power to the regulator to penalise companies that don’t publish required data, and new unfair trading provisions in the Australian Consumer Law. It would specifically prohibit big businesses behaving unfairly when paying small businesses. 

The second category of recommendations urges that data be streamlined and represented more clearly.

“The current Payment Times Reporting Register involves a large dataset, with various reporting categories,” Westney says. 

“Some small businesses find [it] difficult to navigate, review and analyse. By simplifying the data, businesses of all sizes (and their accountants) will be better able to assess standard terms and identify those large businesses that consistently stretch terms.”

The third category of recommendations include measures that would help small businesses recognise unfair payment terms and encourage businesses to invoice electronically. An advocacy body would escalate systemic complaints to the Australian Competition and Consumer Commission (ACCC). 

Maximum payment times

The review’s 14th recommendation sits aside from the others – a recommendation against mandated maximum payment times. 

The IPA advocated for a 30-day mandated maximum payment time through its Senate Education and Employment Committee submission.  

“Without a prescribed period of time, there will be room for ambiguity or arbitrage which can be easily exploited by large businesses,” IPA CEO Andrew Conway said at the time.

Emerson wrote in the review that, although he considered the viability of recommending  maximum payment terms, he decided that “mandating would create problems that would overwhelm its usefulness and do more harm than good for small businesses”.

The problems identified include the difficulty of setting an ideal payment time for all, slowing down already-fast payers, the low likelihood of small businesses speaking up against those in breach, and large businesses choosing to trade with other large businesses to avoid the burden of compliance. 

What the government response means for small businesses

In December, the Federal Government announced it would spend $8.1 million implementing all the review’s recommendations. This will likely affect small businesses in three ways. 

First, better data will enable better decision-making and more accurate forecasting. 

“Greater quality and presentation of data will support effective decision making, to the extent imbalances in market power permit small businesses to freely select with whom they contract,” Telford says. 

“It can be expected that accountants will have a key role in interpreting relevant information and supporting their clients in making informed, high-quality decisions.” 

Sedgwick believes that, if the recommendations are effectively implemented and assuming big businesses comply, small businesses may be better able to to predict their cash flow. 

“Accountants who provide forecasting and budgeting services may be able to more accurately [foresee] challenges and put in place plans to manage [their clients] through those times,” Sedgwick says.

Second, small businesses will be in a stronger position to identify problematic big businesses.

“Many small businesses may be unaware of, or unable to identify, unfair payment terms,” Westney says.

“Introducing clear, updated examples under the ACCC guidance will equip small businesses and their accountants with the tools they need to identify situations whereby unfair payment terms have been imposed on them, including portals with large administrative fees or onerous documentation requirements.”

Third, electronic invoicing will reduce the impact of a trend Conway identified when the IPA made its submission – the tendency of some large businesses to cite inaccurate or missing invoices to extend payment times. 

It will also reduce administration, enabling greater efficiency. 

“[This] will assist small businesses in a multitude of ways, including reduced administrative costs, less manual data entry and reduced errors, prompter payments, and process automation,” Telford says.

“[Accountants] will spend less time on data entry and reconciliation, and more time producing the valuable insights that enable small businesses to thrive.”