Greater Improvement in Payment Terms Needed to Put Australia Firmly on the Path to Recovery

Australian firms have improved payment terms for the first time in many months, with a drop of 2.6 days since the previous quarter reducing terms to an average of 54.8 days. However despite the improvement, business-to-business payments remain significantly above the standard 30 day term and there are warnings that a further blow-out in terms could be on the horizon.

Dun & Bradstreet’s (D&B’s) latest quarterly trade payment analysis reveals that payment terms have improved across the board however big business, public firms, companies in the electric, gas and sanitary services sector and those based in New South Wales are the worst payers.

In a separate study, D&B has rated more than 25,000 Australian firms a higher risk of paying their trade accounts in a severely delinquent manner since April 1, 2009, signalling that despite the improvement in payment terms in the June quarter, there could be more cash flow pain to come for many businesses.

Christine Christian, D&B’s CEO, says the improvement in terms is a positive sign however she warns that further pain could lie ahead and that sustained and significant improvement is required to put Australia firmly on the path to recovery.

“In the current climate cash flow and liquidity are absolutely critical to the ongoing viability of firms,” said Ms Christian.

“The latest trade payments data shows an improvement in payment terms which will undoubtedly assist business cash flow. However to reverse the negative impact of long-term lagging payments and provide a significant boost to business funds will require a sustained period of significant and continual improvement.

“Consequently, we believe pressure on payment terms and cash flow will persist at least through until the end of 2009. The flow-on effect of this trend is a reduced focus on business development and investment, and this means Australia’s economic growth will continue to come under pressure.”

Business size

Big business continues to be the worst paying group, having held this position for in excess of eleven consecutive quarters. However the 2.6 day improvement since the previous quarter brought the group’s terms back under 60 days (59.5).

Firms with 6-19 employees continue to be the quickest to pay. An improvement of 2.4 day quarter-on-quarter (q/q) and 1.6 days year-on-year (y/y) had this group averaging 51.5 days to pay its bills. Meanwhile, businesses with 200-499 employees were the biggest improvers, reducing their payment terms by 3.2 days q/q. This group averaged 56.3 days to settle accounts in the June quarter and was the 2nd slowest paying group.

Industry

All sectors reduced payment terms on a q/q basis. An improvement of 1.8 days q/q took the agriculture industry’s payment terms back under the 50 day mark (49.2) and kept them in the position as the fastest paying sector. The fishing sector was just behind at 49.6 days following a 3.4 day improvement q/q.

The electric, gas and sanitary services sector was the slowest to pay in the June quarter and the only sector to be above the 60 day mark (60.3). The sector did however improve terms by 1.5 days q/q. Meanwhile, the finance, insurance and real estate sector had the biggest improvement in terms, down 4 days q/q to average 54.9 days to settle accounts in the June quarter.

Public | Private

Private companies have continued the trend of being quicker to settle their accounts than their public company counterparts, a position they have held since Q3 2008. Private firms took 2.6 days off their payment terms q/q to average 54.7 days to settle accounts during the June quarter 2009. Meanwhile, public companies improved terms by 2.4 days q/q, taking their payment terms back under the 60 day mark (59.0).

State

At a state level, Tasmanian based firms remain the quickest to pay, a position this group has held since Q4 2008 when it bumped Western Australia out of the top spot. Tasmanian firms averaged 50.5 days to settle accounts in the June quarter, a 2.1 day improvement since the previous quarter. Western Australian based firms retain the second position, improving by 2.7 days q/q to average 51.6 days to pay bills.

New South Wales (NSW) based firms have returned to their position as the slowest paying state (at 56.0 days) despite improving terms by 2.7 days q/q. Victorian based firms, who were the slowest payers in the March 2009 quarter, improved terms by 3.4 days to average 55.8 days to settle accounts in the June quarter. The ACT experienced the most significant improvement in terms, taking 3.5 days off payment days since the previous quarter. Firms based in the ACT averaged 54.9 days to settle accounts in the June 2009 quarter, with this figure ranking them as the third slowest payers behind New South Wales and Victoria.

D&B’s latest global payments analysis reveals that the trend of deteriorating payments which was evident in Q4 2008 continued in Q1 2009, with ten countries in the Asia-Pacific region now paying 30 percent or more of their bills at 30+ days past due and a number of countries increasing the percentage of late payments as compared to the previous quarter. A total of 42 countries globally now pay in excess of 30% of their bills at thirty days or more past terms.

Many of Australia’s trading partners in the region have increased the percentage of bills that are paid in a severely delinquent manner, with China, Vietnam, Korea, Singapore, Hong Kong, Taiwan, Bangladesh, Pakistan and the Philippines all experiencing a deterioration in payment terms.

Of particular concern is the deterioration in China’s payments. Mineral exports to China have placed Australia in a stronger position than other economies in weathering the global economic storm however with payment terms in China appearing to be on a worsening trend, Australian firms could face further pressures on their cash flow in the months ahead.

Japan’s payment performance is also showing signs of deterioration, with the percentage of severely delinquent payments increasing year-on-year. Japan is one of the better payers within the region, with less than 20 percent of payments made at 30+ day past due however any blow-out in payments can have significant detrimental impacts on a firm’s cash flow.

“As economies around the world continue to be impacted by the credit crisis and as the affect of government stimulus packages begin to wane, payment performance could continue to deteriorate,” said Ms Christian.

“Regardless of an organisation’s size or sector, strong cash flow is a critical success factor. Australia is faring better than other nations amidst the global credit crisis but if we are to experience sustained improvement that is capable of putting us back on the path to growth, then continuing to reduce payment cycles must be seen as a priority,” said Ms Christian.