Debt recovery efforts will be improved significantly following announcement by Australia’s Finance Minister Mathias Cormann that the federal government will be using e-invoice and begin paying businesses late payment interest. The new rules took effect on 1 January 2020 starting with the Department of Finance and Services, with the rest of the federal government agencies following suit over the year.
“E-invoicing will improve business cashflow through faster payment times and deliver significant benefits and efficiencies to suppliers and the Government by reducing transaction costs and handling errors,” Sen. Cormann said in a statement.
E-Invoicing & Efficient Payment Recovery
The policy is a result of joint efforts by the Australian and New Zealand governments to use the internationally established Pan-European Public Procurement On-Line (PEPPOL) framework already being used in Europe and Singapore to create a better business environment in the Trans-Tasman area.
E-invoicing will reduce payment time. Recognising the impact of extended payment terms to small-medium enterprises (SMEs), the Morrison government has been in the frontline in proposing digital invoicing technology. While the new rules currently relate to procurement contracts with the federal government, Sen. Cormann encourages the private sector to follow suit.
It takes 36.7 days for an SME to be paid by a big business, according to the Australian Small Business and Family Enterprise Ombudsman. The Australian Tax Office (ATO) believes use of e-invoicing will reduce payment times as e-invoice reaches destination quickly, especially when the destination is using the same business management software. The small business ombudsman believes e-invoicing will improve cash flow for businesses. The ombudsman’s office has reported that late payments continue to hamper small business viability, with half of all small businesses reporting late payments on 40 per cent of their invoices.
Businesses can save $21.69 when they switch to e-invoice. The ATO said a business spends $9.18 to process an e-invoice, while a business will spend $30.87 to process a paper invoice and $27.67 to process a PDF invoice. Further, as e-invoices conform to standards, this ensures that information exchanged is correct and high quality. E-invoicing reduces manual handling and re-keying of information to make sure that are few incorrect or lost invoices. Because invoices are sent directly to the business, there are reduced opportunities for fake or compromised invoices, billing scams, and money loss.
E-Invoicing & Shortened Payment Time
E-invoicing improves efficiency by the simplification and automation of exchange and processing. By using the digital form of invoice, businesses reduce the time it takes from them to process payments. The ATO said small businesses are collectively owed $26 billion in unpaid invoices at any given time. Of all late payments, over 20% are due to errors on invoices and of those, over 20% are due to the invoice being sent to the wrong recipient following manual data entry.
The new rules will provide for interest payments to those businesses who are not paid within five days from the submission of invoices. The 5-day late interest payment policy will apply to contracts valued up to $1 million. This policy has a significant positive impact on businesses transacting with the federal government because data from the finance ministry showed that 94.8% of contracts by volume (or 69,611) were below $1 million. Interest will be paid for every day delayed.
Payments made without e-invoicing will maintain the 20-day term until all government agencies will impose the 5-day term throughout 2020. The 5-day term will also only apply to domestic small-medium enterprises (SME) suppliers and won’t include contracts or standing offers already in place. For businesses to effectively take advantage of the new rules, the ATO though has one advice: Make sure information in e-invoice is correct.
“While businesses will still need to apply their internal quality assurance processes, e-invoicing will provide opportunities for business owners to focus on growing their business, rather than spending time on labour-intensive and costly administrative processes,” ATO e-invoicing director Mark Stockwell said.
E-invoicing is nothing short of revolutionary in the way businesses work. It is a crucial transition that has the welfare of domestic SMEs in mind. While the new rules on e-invoicing and 5-day late payment interest policy is still solely limited to government contracts, there is no stopping private businesses from following suit. A more streamlined payment process that minimises invoice errors will ensure timelier payments and improved debt recovery efforts.