He’s advocating a culture change in business to bring about quicker payments in instances where there are now delays, similar to what is being proposed by the Australian Government.
Nash will wait to see the effectiveness of the Australian initiative, hopefully by later this year. If necessary, he will take a paper to the Government aimed at a course of action.
His targets are large companies that delay payments to smaller trade suppliers and contractors, causing cashflow difficulties for them. He’s not aiming at Fonterra specifically but the size of the big dairy exporter, and its stated policy of paying on invoices 61 days from the end of the month they are dated, make it a centre of attention.
“If Fonterra can give me genuine reasons why this is their policy I’d take another look at it, but if it is because they are a dominant business, you’d just have to shake your head and say play fair with your suppliers.”
Fonterra brought in the policy in 2016, during a slump in milk prices, and has retained it despite the subsequent price recovery. It has said it is not reviewing the policy.
However, a spokesperson said through the normal commercial negotiation process with smaller suppliers with particular cashflow requirements, it tries to find terms that suit both parties. These can include more flexibility around payment terms.
Fonterra sells to customers around the world that also have a 60-day invoice payment policy. The full product cycle, from manufacture to payment, can easily take up to six months, she says. This doesn’t seem to hurt Fonterra’s cash flows, about $1.35 billion in its latest year.
Slow payments to trade contractors are a key reason why some of them go out of business, but there’s no guarantee a Government push to change the culture will make a difference, Dunedin accountant Tony Marshall says.
“We see it a lot through the contractor and sub-contractor relationships, where you get a small business plumber, electrician, or engineer getting squeezed when big companies delay payments. They’re having to carry the cost of capital and will be paying quite high interest rates on their debt.”
Marshall, a partner at Crowe Horwath accountants, says the impact on the wider economy is being shielded by the very strong job market, so a trade supplier going out of business can easily get work with someone else.
“But that can change if we get a turn in the cycle, like we had in that late 2000s period, and the boom/bust cycle seems to be getting shorter.”
Marshall knows of instances where sub-contractors submit an invoice to a main contractor, and the main contractor submits his invoice to the client business. But often, the client will not pay on the larger invoice for 60 to 90 days.
“So, for the smaller guy, the head contractor will not pay until he’s paid, but your costs keep accruing, and it gets hard to keep paying wages. It puts the squeeze on cash flows of the littlest guy and that’s why a lot of them struggle and then fail.”
The issue is across industries but is prevalent in the building industry. A problem is a small supplier might not get paid but will keep on providing services in the expectation of being paid.
“You can be in the third month, without being paid in month one or month two, and the contractor is in significant difficulty, and then the client can fall over.”
Marshall agrees with Nash that invoices should be paid out on the 20th of the month following receipt, formerly common practice and still followed by many people, but said many terms of trade were predictably based on terms that suit the bigger party. Many small companies are also squeezed on pricing because of the competitive nature of many sectors.
Changing the culture on invoice payments would reduce the stress on small companies, Nash says. The Government would also have to ensure it was “walking the walk”.
He says the Ministry of Business, Innovation and Employment has told him there are delays in many invoice payments across the economy because up to 40% of them contain errors that have to be sorted out.
