Lengthening payment times have long been a problem in Australia. And the small business sector, including Kate Carnell, Australia’s former Small Business Ombudsman, called on the government to do something to help small businesses protect their cash flow.

For this reason, the federal government introduced the Payment Times Reporting Scheme (PTRS) in 2021. The scheme compels business and government enterprises with more than A$100 million in annual income to report every six months on the payment terms they offer to smaller suppliers.

With the first round of reports due on 30 September 2021, chief financial officers of large Australian businesses now face a dilemma. They must strike a balance between managing their organisation’s working capital while speeding up supplier payments.

Success will boil down to their ability to improve efficiencies across their invoice to payment cycle and many will use supply chain financing as a practical solution to achieve this.

Supply chain finance and trade finance

When many finance professionals consider supply chain finance, they will think of Greensill Capital. Greensill engaged in a number of deeply inappropriate practices; the starkest, perhaps, was that it strong-armed its customers’ suppliers into accepting early payment discounts with limited to no room for negotiation.

However, when negotiated correctly, supply chain finance can accelerate cash flow for all parties and enable CFOs to tread the delicate tightrope set for them.

Cash is king for small companies, so most are happy to be paid as quickly as possible and will often accept a small discount on their invoice in exchange for early payment.

If this is all executed via a supply chain finance facility, CFOs can keep suppliers, shareholders and government regulators happy, without taking a hit to their own cash flow.

Another way to prevent lengthened payment times is through trade finance, which works by introducing a third-party financier into your transaction, creating a business line-of-credit funding facility that you can then repay over time.

This is particularly helpful for businesses that have global suppliers needing immediate cash flow to help pay for overseas stock.

With both international and domestic suppliers now generally requiring upfront deposits in times of economic uncertainty, trade finance is becoming more popular. It’s a way for CFOs to ensure they have enough funds to pay their suppliers on time.

It’s also worth noting that in a volatile, COVID-dictated environment, timely payments are often necessary to maintain a trustworthy partnership with your suppliers, improve your business’s reputation and gain an edge on competitors. These factors can make all the difference in securing a sustainable competitive advantage.

How to negotiate early payment discounts

With only a couple of weeks remaining before the first PTSR reports are due, it’s time to begin identifying ideal suppliers with whom to negotiate early payment discounts.

Suppliers who may be receptive to this approach include those with a healthy profit margin, those in countries with higher interest rates or those that have difficulty accessing funds.

How you approach your suppliers is crucial. Remember to be courteous and upfront. And ensure early payment discounts are negotiated with suppliers, not forced on them.

Both supply chain finance and trade financing options can lead to mutually beneficial long-term supplier relationships. By improving payment conditions, a business will generate goodwill and trust in their supply chain community, encouraging high-quality suppliers to be more loyal and likely to recommend them to others.

“By improving payment conditions, a business will generate goodwill and trust in their supply chain community.”

Under the new legislation, large businesses must disclose where they are using or offering supply chain financing arrangements with small business suppliers, but there is no indication that the reporting framework is intended to reduce its use.

Many CFOs will find that for PTRS compliance and for getting ahead in the post-COVID economy, earlier payment times will be good for business.

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