Payment times remain low
Businesses continue to pay their bills in historically record time, with the Q3 2016 results of Dun & Bradstreet’s Australian Trade Payments Analysis revealing the national average time taken to settle invoices during the three months to September was 44.8 days. The result, which shows little change from the 44.9 days recorded in Q2, suggests firms have no problem accessing funds and are choosing to settle accounts as soon as possible. The latest payment time is below the 45.1 days recorded for the same period in 2015 and represents the lowest Q3 average payment time in the report’s history.
According to Stephen Koukoulas, Economics Advisor to Dun & Bradstreet: “The time it takes firms to pay their bills has eased marginally during the past two quarters and remains near historical lows. Record low interest rates, steady if not spectacular economic growth and solid company profits are encouraging firms to lessen the time taken to pay their bills.”
Koukoulas added: “The low trade payments times in both Australia and New Zealand, and the sharp drop around two years ago, coincided with the start of the rapid fall in inflation and interest rates.
“That said, historically, New Zealand firms pay their invoices more quickly than Australian firms pay their invoices. It is not clear why this gap exists given that over the medium term, the economic performance and level of interest rates in both countries has been similar. One issue that may account for the difference is that agriculture, which has the quickest invoice payment times, is a larger part of the New Zealand economy than in Australia. This may skew the trade payment numbers lower in New Zealand.”
“Further details show that 72 per cent of invoices are paid promptly, which is defined as being 30 days or less, with 24 per cent of invoices paid within 31 to 60 days. Only 8 per cent of invoices are unpaid for more than 61 days, with just 1 per cent over 121 days.”
The third quarter of 2016 saw 72 per cent of businesses settling their invoices within 1-30 days, the highest proportion in the series’ history. The Agriculture sector made up the largest portion of prompt payers, accounting for 9.74% of the Prompt bracket, while Services was the laggard at 3.7%.
According to Dun & Bradstreet’s latest Business Expectations Survey, 31.4 per cent of businesses would choose to miss a payment to a trade supplier if they were unable to pay all of their bills. This was closely followed by a business credit card at 28.3 per cent, and a business loan or overdraft, at 16.8%. Some 57% of businesses said they were “generally optimistic” about business growth in 2017 compared to 2016.
Nationally payment times remained mostly flat between the second and third quarters, with marginal movements across the states and territories. Western Australia was the standout, shaving two full days off average payment times between Q2 and Q3. Tasmania remains the fastest paying region, largely as a result of the high amount of agricultural companies in the state. The ACT continues its long run as the slowest paying region, with average payment times rising from 50.4 days to 51.0 days, quarter on quarter.
The Forestry, Construction and Services industries were the only sectors to record an increase in payment times between Q2 and Q3. When compared to the corresponding quarter in 2015, however, the picture was more mixed, with the Forestry, Fishing, Mining, Transportation and Communications industries all reporting increased payment times, year-on-year. The Utilities sector saw payment times fall the most over the year, with invoices paid in 47.9 days on average during Q3 2016, compared to 53.7 days for the same quarter in 2015.
Agriculture remains the fastest-paying industry, settling invoices in 38.4 days on average and accounting for 72 per cent of the Prompt (1-30 days) payment category. Businesses operating in the Communications sector are the slowest to pay, taking 52.2 days on average to make payment.
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.