Record low payment times despite mixed signals
Australian businesses settled their invoices at a record pace for the fourth consecutive quarter with an average rate of 43.7 days for the first three months of 2016. The result is a slight improvement on the previous quarter’s average of 44.1 days, and is almost 7 days faster than the prior corresponding period’s 50.4 days, as revealed by Dun & Bradstreet’s latest Trade Payments Analysis.
The results come during a period of mixed economic signals, and as revealed by Dun & Bradstreet’s Business Expectations Survey results so far in 2016, in an environment marked by increasingly cautious sentiment amongst businesses leading into the Federal election.
Apparent in the analysis is the existence of disparate trade payments behaviour based on business size. On one hand, small to medium sized businesses are clearly cashed up through low borrowing costs, relatively low input costs and non-existent wage growth, and are paying their invoices with unprecedented swiftness. Businesses with between 6 and 19 staff settled their invoices at the fastest average rate of 40.2 days. This is despite a rise in business failures recorded over the same period.
Conversely, those businesses with more than 500 employees are flexing their muscle and paid their invoices at the slowest average rate of 52.4 days.
The first quarter of 2016 saw 68 per cent of businesses settling their invoices within 1-30 days, unchanged from the previous quarter and a significant improvement on the 56 per cent recorded a year earlier.
According to Stephen Koukoulas, Economics Advisor to Dun & Bradstreet: “The fall in the trade payments times suggests that firms are cashed up and are able to pay their bills in a more timely manner. These results, which pre-date the most recent interest rate cut from the RBA, suggest that interest costs were not a problem for most businesses and that further interest rate cuts, if there are any, will not help the business sector all that much from a cash flow perspective”.
Koukoulas added: “The economy is clearly seeing a lot of conflicting news at the moment. The favourable news on trade payments times is in sharp contrast to the slump in business expectations and the softer tone evident in the economy in the past few months”.
According to Dun & Bradstreet’s March Business Expectations Survey, 51.2 per cent of businesses would choose to miss a payment to a trade supplier if they were unable to pay all of their bills. The survey found that 38 per cent of businesses have had a customer or supplier become insolvent or otherwise unable to pay them during the past year.
Most states and territories recorded slower average payment times compared to Q4 2015, with West Australian businesses increasing their average payment rate by almost four percentage points to 46.1. Businesses in Victoria experienced the most improvement on the previous quarter, with an average rate of 41.9 compared to Q4 2015’s 44.1. However, all states and territories, excluding Western Australia, reported significantly faster rates on the same period last year.
The Fishing and Agriculture industries settled their invoices at the fastest rates of 37.1 days and 38.7 days respectively. The Forestry sector recorded an average payment rate of 44.4 days, around 3 days slower than Q4 2015, and comes after it booked seven consecutive quarters of declining average payment times. The Mining industry also saw an almost 2-day increase on the previous quarter’s average payment time to 50.5 days.
About Trade Payments Analysis
Business-to-business payment information is a highly predictive data set and a critical element in credit risk scores and business failures forecasting.
The distinct advantage of trade information over other forms of company data is its ability to provide insight into current performance. Company financials, which are considered to be critical to effective decision making, are reported relatively infrequently and as a consequence, organisations may be required to make decisions using data that is up to 12-months old. Conversely, because trade information is reported monthly, it reveals how an organisation is paying its existing obligation.
Trade data is also effective across all business sizes, being the most predictive element in SME scores and the second most predictive (behind financials) in other credit scores. The predictive nature of trade data combined with its timely availability enables businesses to properly assess credit risk.
This includes the identification of both high and low risk customers, thereby enabling firms to minimise the risk of late payments and bad debts and identify the good credit accounts that will create long-term, profitable credit relationships.
The articles represent the views of the authors and not necessarily that of the Bank. You should seek independent professional advice before acting on any matters set out in the articles.