Brace yourself for impending change through a dire need for innovation in supply chain finance. The key issue facing squeezed suppliers is certainly not a new one. Neither is the growing appetite for large businesses looking for more efficient working capital through longer payment terms.
Recent events may indicate that the beginning of regulatory processes to legislate Australia’s large corporates to pay on shorter payment terms is near. And as shareholders begin bracing themselves, innovative supply chain solutions are required to help solve the problems facing Australian SMEs.
The Word: According to the Small Business Ombudsman
Small Business Ombudsman (Kate Carnell) revealed on July 28, 2016 that the majority of small business failures are by far a result of poor cash flow, with slow payments from customers or clients a leading factor.
Under control of the Treasury Department, the Small Business Ombudsman was established via parliament legislation in 2015 – and ultimately appointed on March 11, 2016. In its first public announcement in Australia’s The Age newspaper, Late Payers, the Silent Killers of Small Business, it seems to have almost proposed an enquiry into the (late) payment practices of Australia’s large corporates. Practically all key corporate sectors are named in the article.
Bargaining Power Drives Market Power
Perhaps the most fundamental risk involves taking a one-size-fits-all approach; forcing corporates to pay suppliers even before they have produced goods or sold them to customers. You could say the bargaining power between supplier and customer is driven by their relative market power. But is legislation really the most effective way to offer a working capital free-kick to small business?
Any regulation that mandates short payment terms jeopardises the balance sheet of corporate Australia and could result in:
- Shareholder demand for higher returns through cost reduction (i.e. potential job losses);
- A need to improve margins to compensate for increased cost of capital (higher prices for consumers or force suppliers to accept lower prices); or
- Reduced investment in working capital (i.e. buy less per transaction and force suppliers into costly “just in time” supply chain structures).
Ultimately, some of these consequences are likely to hurt the very SMEs they’ve intended to help.
Sparking Shareholder Outrage
Many corporates have extensive working capital cycles – namely the mining, wine and manufacturing sectors. These cycles often involve longer payment terms and at least some of the working capital risks need to be shared with suppliers.
Shareholders in these businesses would rightly be frustrated if they had to assume all the capital risks associated with growing and producing products.
From Good to Great: Innovate
Innovation in trade finance remains a vital component of the solution set, and much preferred to regulation and legislation. We know regulation can lead to unintended consequences and is a clunky way of shifting costs from one counterpart to another.
Innovative supply chain funding would actually improve the competitiveness and bargaining power of SMEs. Particularly as they fight for business with larger competitors by reducing the funding constraint to seek new business as they make their pitch for that next big contract.
We know that SMEs are screaming out for help when it comes to cash flow and access to affordable funding. These are two of the key issues referenced by Australia’s central bank in a recent conference paper discussing the challenges facing Australian SMEs. Innovation in supply chain finance solves both of these issues. Legislation may address cash flow, but at what cost to SMEs?
Any form of regulation presents issues when it comes to mandating short payment terms by big corporates. There’s still the question of:
- The most appropriate payment terms;
- The capability of a finance system and payment process to deliver;
- Penalties; and
- All additional costs of increased capital that filter down to end consumers, shareholders, superannuation investors or SMEs.
A Final Word
While the advocacy bodies like the Australian Small Business and Family Enterprise Ombudsman have an important and meaningful role to play, regulating or legislating to solve the problem may not be the best solution. We’d hope any investigation covers a broad range of solutions, highlighting and focusing on the innovation that is already out there as a means of solving the issues facing SMEs.
What do you think the impact of legislation will be? How would it affect your business? Get in touch if you have any questions.