Shortage of capital and restricted business growth due to a deteriorating domestic economy, tighter financial conditions and more competition. Challenging times for Australian businesses.
Australia’s economy is losing some steam, with GDP forecast to decrease to 2.1% from 2.8% last year. Uncertainties over the continued trade dispute between the USA and China, Australia’s biggest trading partner, are clouding the economic outlook for a country where concerns about deterioration of the domestic economy and tighter financial conditions for businesses are high. According to most of our survey respondents in Australia, this could lead to a shortage of capital and restrict business growth.
Australian respondents lead the way in Asia Pacific in terms of selling on credit to B2B customers
Australian respondents are operating in a more challenging business environment than last year. The business environment is more competitive putting more pressure on profits. To keep sales levels up, Australian respondents have been offering B2B customers credit significantly more often than they had in the past. Compared to one year ago, there was a 50% increase in B2B sales made on credit by respondents in Australia. Credit sales now amount to 71.5% of the total value of sales to B2B customers, up from 47.7% last year. Cash-based sales, in contrast, contracted to 28.5%, down from 52.3% last year. These figures position Australia as the country leading the way in Asia Pacific in terms of granting trade credit on B2B transactions.
Not surprisingly, with such large volumes of goods sold on credit respondents in Australia appear to be keenly focused on collecting receivables as quickly as possible to reduce the costs associated with payment defaults and losses on uncollectable invoices. To accelerate the collection of invoices, reduce the risk of uncollectable invoices, and lower external financing costs respondents in Australia appear to maintain very strict credit management policies, with short payment terms. These average 24 days from the invoice date, two days shorter than last year and well below the 32 days average for Asia Pacific. These are the shortest payment terms in Asia Pacific.
1 in 4 Australian respondents reported no strategic approach to credit management
Survey findings in Australia highlight that businesses’ credit policies are a balanced mix of credit management techniques, adding to the short payment terms commented on earlier. The assessment of the credit quality of the customer, prior to making any trade credit decision, plays a key role in respondents’ common business practices (as mentioned by 26% of respondents). The same percentage of respondents also offer early payment discounts to encourage customers to pay their invoices earlier than the due date. While there appears to be a significant focus on collecting payment of invoices, it is striking that 1 in 4 Australian respondents stated they do
not have a strategic approach to credit management.
Bad debts written off as uncollectable increased over the past year
Survey findings reveal that, this year, Australian respondents are converting past due invoices into cash six days faster than last year. On average, overdue invoices are collected within 10 days of the invoice due date. Despite this marked improvement, on average, 20.6% of the total value of B2B invoices issued by survey respondents is past due (well below the 29.8% average for Asia Pacific). In order to remain financially sound and avoid liquidity issues caused by customers’ payment default, many Australian respondents (34%) said they had to delay payment of invoices to their own suppliers. 31% reported they had to take various internal and external measures to correct cash flow, while 46% reported no significant impact on their business. On the negative side, receivables that were written off as uncollectable increased to 1.7% of the total value of B2B sales on credit (up from 1.3% last year). This suggests that businesses are less successful in collecting long overdue invoices, but also that the business environment could be deteriorating. Despite the increase, write-offs were below the 2.1% regional average.
Growing interest in using credit insurance to more safely increase sales and profitability
The majority of respondents in Australia (68%) do not anticipate changes in the payment practices of their B2B customers over the coming months. 21% anticipate an improvement, while 11% expect a worsening in the form of an increase in late payments. To protect their business against the risk of payment default by their B2B customers, many Australian respondents (47%) will increase reserves against bad debts or use credit insurance.
Overview of payment practices in Australia
By business sector
Australian respondents from both the manufacturing and the consumer durables sectors extended the longest average payment terms (averaging 29 days and 28 days from the invoice date respectively). Respondents from the services and agri-food sectors extended the shortest payment terms (averaging 24 days).
Trade credit risk is high in the wholesale/retail/distribution and consumer durables sectors
The value of overdue invoices in the Australian consumer durables sector and the wholesale/retail/distribution sector amounts to 35.6% and 31.1% respectively based on the total value of respondents’ B2B invoices. This compares to an average of 20.1% in the manufacturing sector and of 15.7% in the services sector.
A strategic approach to credit management should begin right from the start, even before the credit sale is made.
Proportion of uncollectable receivables highest in the wholesale/retail/distribution, agri-food and consumer durables sectors
On average, 2.1% of the B2B receivables from respondents in the Australian wholesale/retail/distribution sector were written off as uncollectable. This is the highest proportion in the country. At the other end of the scale, 1.6% and 1.5% of the receivables from respondents in the manufacturing and services sectors, respectively, were written off as uncollectable. The agri-food and consumer durables sectors fell in the middle with 1.9% of receivables written off.
By business size
Respondents across all business sizes surveyed in Australia extend payment terms that do not differ significantly from the country average. In other words, short payment terms are more or less the standard for the country.
Large enterprises in Australia the hardest hit by payment defaults of B2B customers
Overdue B2B invoices in large enterprises now account for 25.7% of the total value of B2B invoices. This compares to 23.8% for SMEs and to 14.9% for micro-enterprises.
Australian micro enterprises least impacted by uncollectable invoices
Large enterprises in Australia recorded the highest proportion (2.7%) of B2B receivables written off as uncollectable. The average for SMEs is 2.3% and for micro-enterprises less than 1%.