Why cash is no longer king in Australia

A new study of Australian businesses, commissioned by trade credit insurance provider Atradius, has revealed Australia is leading the way in Asia Pacific for granting credit on B2B transactions, with credit sales now amounting to 71.5 per cent of the total value of sales to B2B customers. In contrast, cash-based sales contracted to 28.5 per cent, down from 52.3 per cent last year.

Atradius surveyed 219 Australian companies, including micro-enterprises, small and medium enterprises (SMEs) and large enterprises. The results show that while Australia is leading the way in credit sales, worryingly, one in four businesses stated they did not have a robust credit management strategy to protect the number one asset keeping them in business – cash flow.

While debt collection is a high priority for Australian businesses, this is a reactive strategy, and businesses need to be more proactive to ensure they are protected in the event of non-payment before it even happens.

Atradius Oceania MD Mark Hoppe says, "The global economic outlook for 2019 is uncertain with growth rates expected to ease. Tightening global monetary conditions and increased volatility in financial markets are all contributing to the slowdown.

"Trade tensions, including uncertainties over the continued trade dispute between the United States of America and China, Australia's biggest trading partner, are also clouding the economic outlook.

"This is during a time where concerns about the deterioration of the domestic economy and tighter financial lending conditions for businesses are high. As a result, businesses are operating in a more challenging and competitive environment than last year, which is placing increasing pressure on profits.

Payment terms in Australia were the shortest in Asia Pacific, averaging 24 days from the invoice date, two days shorter than in 2018 and well below the 32 days average for Asia Pacific.

With such large volumes of goods sold on credit, respondents appeared focused on collecting receivables as quickly as possible to reduce costs associated with payment defaults and losses on uncollectable invoices.

However, receivables that were written off as uncollectable rose to 1.7 per cent suggesting that businesses are less successful in collecting long-overdue payments in this challenging economic environment.

More than one-quarter of respondents (26 per cent) saw assessing the credit quality of the customer, prior to making any trade credit decision, as a key business practice. The same percentage of respondents also offered early payment discounts to encourage customers to pay their invoices earlier than the due date.

Respondents were converting past invoices into cash six days faster than last year and, on average, overdue invoices were collected within 10 days of the invoice due date.

However, despite this improvement, on average, 20.6 per cent of the total value of B2B invoices issued by respondents was well past due.

To remain financially sound and avoid liquidity issues caused by payment default, more than one-third of respondents (34 per cent) said they had to delay payment of invoices to their own suppliers, with 31 per cent needing to take various internal and external measures to correct cash flow.

Receivables that were written off as uncollectable increased to 1.7 per cent of the total value of B2B sales in 2019, up from 1.3 per cent in 2018.

Trade credit risk is high in the consumer durables and wholesale/retail/distribution sectors, with the value of overdue invoices amounting to 35.6 per cent and 31.1 per cent respectively based on the total value of respondents' B2B invoices.

This compares to an average of 22.3 per cent in the construction sector, 20.1 per cent in the manufacturing sector and 15.7 per cent in the services sector.

Hoppe concludes, "The shortage of capital is restricting business growth and making it more difficult for customers to pay their invoices. The manufacturing and consumer durables sectors have always seen longer payment terms, averaging 29 days and 28 days from the invoice date respectively. However, even sectors that normally see the shortest payments terms, like services, are seeing increases from an average of 16 days in 2018 to 24 days in 2019.

"Businesses all over the world, including Australia, are currently facing challenging times, so there is a growing demand for sound market intelligence and insurance-based protection against non-payments.

"Especially as businesses continue to extend credit instead of requiring cash payments, it becomes even more important to protect their accounts receivable. Trade credit insurance is a valuable business tool in uncertain times to help minimise the risk of extending credit to the wrong customers and if those customers do fail to pay, to protect the business's cash flow.