The new payment times reporting framework will affect big business

On the 30th September 2021, the first round of reporting under the new Payment Times Reporting Scheme (PTRS) is due. The legislation requires enterprises in Australia with over $100 million in total annual income to report the payment terms they offer to suppliers every six months.

The hope is that, by increasing the transparency on payment practices, large businesses will be motivated to pay suppliers faster, eliminating cash management practices that unfairly disadvantage smaller Australian suppliers. 

The chief financial officers (CFOs) of large Australian businesses now face a dilemma, however. They must strike a balance between managing their organisation’s working capital and driving shareholder value, whilst speeding up supplier payments. Success will boil down to their ability to improve efficiencies across their invoice to payment cycle and many will utilise supply chain financing as a practical solution to achieve this.

Failing to plan is planning to fail

The new PTRS scheme came into effect in January this year which means that businesses have had a few months to plan ahead. If, however, you have forgotten about these changes, it’s now time to assess whether your working capital position is strong enough to bring forward any lagging supplier payments. Of course, these reports will be required every six months, so improvement to payment times can, and should, be made gradually. 

As we are still in the thick of a global pandemic, traditional funding sources may be limited, or it may be too late to source additional funding from your regular facility. Under the new legislation, large businesses must disclose where they are using or offering supply chain financing arrangements with small business suppliers, however there is no indication that the reporting framework is intended to reduce its use. 

In fact, using a supply chain finance facility might be a suitable solution for CFOs in need of cash to finance payments without taking a big hit to their working capital, both in the run up to the 30th September deadline and on an ongoing basis. Deployed correctly, supply chain finance can also lead to improved long-term relations with suppliers, but it’s important to approach these conversations in the right way. 

Solving the CFO’s dilemma

Many finance professionals will think of Greensill when they consider supply chain finance. There were a number of deeply inappropriate practices that Greensill engaged in, but perhaps the starkest was that the company strong-armed the suppliers of its customers (the buyers) into accepting early payment discounts and provided limited room for negotiation.

In fact, when negotiated correctly, early payment discounts can be beneficial in accelerating cash flow for all parties and can enable CFOs to tread the delicate tightrope set for them. All suppliers want to be paid as quickly as possible so are often happy to accept a discount for early payment, while securing discounts will also keep shareholders happy. If this is all executed via a supply chain finance facility, CFOs can offer this solution to suppliers without taking a hit to their own cashflow. 

Such arrangements can also strengthen your relationship with suppliers, build trust, and enhance your overall brand reputation. In a volatile, Covid-dictated environment, loyal suppliers can offer a huge competitive advantage to your business. 

How to negotiate early payment discounts

It’s imperative that early payment discounts are negotiated with suppliers, not forced onto them. The first step in doing this is to assess the financial situation of each of your suppliers and identify which ones will be receptive to being paid more quickly in return for an agreed early payment discount. 

Suppliers with a healthy profit margin may be able to absorb a discount for instance, while suppliers most at risk of a cash flow squeeze may also welcome this as a means of avoiding lengthy payment terms. Consider too, the businesses critical to your supply chain and those with whom you have a strong, mutually beneficial relationship. The next step is to generate buy-in from the suppliers you have identified. 

Be courteous and approach these negotiations in an upfront and friendly manner. Prepare ahead of these conversations by listing out the advantages this type of arrangement may have for all parties involved. Alternatively, you can reach out to a Supply Chain Finance provider for professional advice on how to start the conversation. 

With only a couple of weeks left until the 30th September PTSR reporting deadline, it’s important to start conversations with suppliers now if you’re intending to use a supply chain finance facility to reduce the time it takes for them to be paid. After all, earlier payments to your suppliers will not be as costly as the reputational damage incurred if you’re refusing to budge on unreasonable payment times. 

About the author: Joe Donnachie is a Supply Chain Finance Manager at Octet, a company that provides working capital finance and payment solutions.