Recent research has revealed an unexpected dark side to Australia’s 26 years of continuous economic growth, with the most pronounced effects impacting SMEs.
According to Roger Mendelson, CEO of collection agency Prushka, the lack of a recession for a quarter of a century has meant that competition – particularly for SMEs – is much more fierce, because weaker businesses have been able to survive. This has added to the overall number of businesses operating within a given space.
The end result is that increased competition has lowered margins and created a squeeze on profitability, with nearly half (46.7 per cent) of SMEs reporting that the state of the economy has been the biggest detractor for their business over the past year.
“The generally positive economic environment means even weaker businesses have survived, while technology has boosted productivity and allowed access to larger markets,” he wrote in Prushka’s Canary in the Coal Mine report.
“This has increased the number of players in most sectors, while at the same time reducing operating costs, enabling them to reduce prices to win business.
“By way of response, smarter operators in the B2B sector are extending payment terms to their customers, particularly larger companies with market power. This is, however, causing a squeeze down the line to smaller suppliers, who are in turn forced to squeeze their own suppliers.”
Securing a customer not the only problem
At the same time, chasing overdue invoices is another common complaint for SMEs.
Despite struggling with collecting overdue payments and the resulting cash flow constraints, majority of SMEs are taking more than 90 days to refer debts to a collection agency, according to one industry leader.
Mr Mendelson said recent research by the firm suggests more than half (57 per cent) of SMEs of more than $10,000 worth of outstanding debts and 41 per cent feel that chasing outstanding debts is becoming increasingly difficult.
Yet nearly two-thirds (63 per cent) of those surveyed admit to waiting more than three months before referring debts to a collection agency. Some 24 per cent admit to waiting even longer at 120 days, while 1.4 per cent only ever do so if the debt is disputed.
“It’s disturbing to note that overall debt levels are remaining unchanged or are slightly on the rise. This could have dramatic ramifications,” he said when releasing the research.
Tips for dealing with late payers
In the report, Mr Mendelson warned against putting off debt recovery, as this not only adds to the stress of the situation but also reduces the likelihood of receiving payment.
“In our experience, there are clear steps that businesses can take to shift these intransigent debt levels. One is to pursue debts sooner. We see a clear correlation between the age of debt being referred and the chances of it becoming a bad debt,” he said.
“In reality, debtors who haven’t paid at 80 days are unlikely to pay at 90 or 100 days.
“The other step is to make sure businesses use the time they spend on debt recovery wisely. While technology can be a time-saver, making personal follow-up calls to debtors with outstanding accounts – time consuming as it is – can significantly improve the percentage of invoices kept within acceptable limits.”