Suppliers squeezed in economy threatened by recession
Australia is embroiled in the most challenging economic environment in 25 years, and there’s a ground swell of opinion among economists and business analysts that the country will be in recession, if not by the end of this year, then almost certainly by mid 2017.
For the past quarter of a century, whenever threatened by two successive quarters of negative growth that indicates the start of a recession, trouble has been avoided in Australia by encouraging private sector borrowing and spending.
But we can’t borrow our way out of current trouble.
Since the GFC, private sectors of the world’s advanced economies have collectively de-levered to reduce debt levels from about 170% to 160% of GDP. However, Australia has done the opposite. It’s private debt-to-GDP ratio, now standing at 20% higher than at the start of the GFC, is 50% higher than America’s.
Furthermore, in lowering interest rates to a record low of 1.5%, the Reserve Bank of Australia (RBA) is close to doing all it can do to help turn this situation around. Ultimately the government must be the prime mover in the economy’s restoration.
Meanwhile businesses’ best chance of survival will largely depend on their focus on fundamentals that must include maintaining a full set of consistently updated records, and a constant appreciation of that most fundamental of fundamentals, cash is king.
Big businesses are making survival increasingly difficult for small ones by stretching out payment terms to as far as 120 days, and because SMEs’ survival is vital to the nation’s economy, something needs to be done about this – and Macks Advisory points to mooted changes that are winning support.
Here’s what has to change
US cereal dominator Kellogg and NZ’s dairy multinational Fonterra are reportedly among big companies stretching payment terms to 120 days, a trend that’s pushing many cash strapped suppliers ever closer to the brink of financial disaster. Other multinationals, including Nestle and Unilever already have suppliers on 90-day terms.
With staff, super, rent, power and other bills to pay, plus payroll tax to accommodate, SMEs are fed up with big companies in effect using them as interest-free financiers.
Over the past decade, as Australian payment terms in various sectors have moved through 30 to 60 to 90 days, there’s been an opposite trend in Europe. Three years ago EU legislation was introduced requiring payment for all goods and services within 30 days unless agreed otherwise in writing by parties involved, in which case payments could be extended to 60 days. Many an abused supplier would like to see a similar change to Australian law.
Currently in Australia payment terms tend to vary for suppliers according to sector. For example, fashion is generally more efficient than the packaged groceries sector. Macks Advisory’s sources indicate the norm for rag trade suppliers when dealing, for example, with Big W or Target is 30 days, although Specialty Fashion Group has extended its payment terms to 60 days.
Suppliers to the transport and construction sectors, the latter a notoriously slow payer, have had ever-increasing waits for their money, and mining companies in sync with falling commodity prices have been stringing out their payment terms.
But supermarket chains dominated by Coles and Woolworths are the worst offenders. Previously mentioned Kellogg and Fonterra as well as many other suppliers would likely blame the supermarket giants for forcing them to drag out payments to their own suppliers.
When big suppliers and big customers argue about prices and payment times they tend to make the headlines because mutual interests are highly visible and numbers are big. However, any SMEs invited to play in the big league should never forget that bargaining power is proportional to size, that vulnerability for this and many other reasons can be great, while margins for error are small.
As the sales director of a well-known SA SME told Macks Advisory: “Extending terms of sale may seem good for cash flow, but if they’re serving merely to mask temporally a business’s fundamental problems, then they’re pointless. For it’s a balance sheet that determines a business’s capacity to survive. Cash may be king but with nothing to rule over, kingship’s irrelevant.”
Australian Small Business and Family Enterprise Ombudsman Kate Carnell says this flow-on extension of payment times “imposes a drag on the whole economy.”
So let’s make a list
Instead of legislative change, could a list provide a simple solution to the problem, that is a register compiled by leading small business organisations of the payment terms of companies that are representative of various sectors?
To some extent at least by a so-called naming and shaming process, such a list could diminish abuses of power that big companies derive from their market dominance. For as things stand now, many small companies are with left with no alternative -- if they want the business – than to supply on terms dictated by large customers.
Naturally, abused suppliers are reluctant to risk losing contracts by publicising their complaints. A register of companies’ trading terms would relieve suppliers of this risk. Furthermore, perhaps maintenance of such a register by a group of small business organisations could be a profitable marketing tool to attract members?
Meanwhile large companies continue unchecked to boost profits by using over ever-lengthening periods, goods and services they’ve yet to pay for, while banks also prosper from overdrafts and loans to struggling suppliers.
When Big W earlier this year moved to double payment terms to 60 days, a business analyst claimed this would mean (because Woolies was turning stock over on average every 22 days) that it had free use of suppliers’ money for an average 38 days. Woolies would in effect be using its suppliers as a bank.
However, when Rio Tinto similarly proposed to double its payment times from 45 to 90 days, a supplier backlash, together with political pressure, put a stop to it.
A well-maintained register of businesses’ payment terms for suppliers would do for small owners what political pressure couldn’t or wouldn’t.
There are precedents for all sorts of publicly available lists of varying types of offenders (from multi-national companies to individuals) that are deterrents to potential unfairness and other wrongdoing.
For more information, contact Macks Advisory on 08 8231 3323 or visit our office on Level 8 West Wing, 50 Grenfell Street, Adelaide SA 5000.
