FX International Payments
As part of the research, we interviewed 355 CFOs of mid-sized Australian businesses to better understand their approach to payment of overseas suppliers, and measure the impact of international payments on cross-border relationships.
What concerned us most was that while Australian businesses seek opportunities to expand their overseas supplier network, they don’t take into consideration the delicate balance of managing international payments and cash flow that has seen some businesses struggle and should be a priority challenge for business leaders to address.
While almost all mid-sized businesses (91%) surveyed who use credit cards or charge cards overwhelmingly recognise their value as an effective cash flow management solution, it is clear that not all businesses are maximising the opportunity presented.
Australia lags behind global counterparts when it comes to paying suppliers on time. A recent global report1 found the average Australian invoice was paid 26.4 days past its due date; almost double that of the second-worst offender, Mexico. Such financial ill-discipline is unheard of amongst our largest trading partners, with businesses in countries such as Japan likely to pay invoices before they’re due.
So rife is our culture of international late payment that even the Federal Government has sought to intervene. In a 2013 discussion paper tabled by the Department of Industry, Innovation and Science2 it was found that “late payment ... adds financial and administrative costs, reduces the potential for investment opportunities, damages business relationships and fuels business uncertainty.”
There are many contributing factors contributing to Australia’s late payment culture – from the fluctuating dollar, shifting trade regulations, overly sympathetic suppliers or poorly defined business arrangements.
However the country’s ongoing cash flow management issues are among the most prevalent underlying factors.
For example, for Australian manufacturers there can be months between the initial capital outlay for raw materials and components and the eventual sale of a finished product. Unpredictable fluctuations in product demand further complicates cash flow management, often prompting local businesses to delay payments to overseas suppliers.
Our recent research found almost 30% of mid-sized businesses are still unable to reconcile their supplier invoices at least every other month. Despite an overwhelming majority (94%) of businesses citing the value of on time payments to their business, many said cash flow is the number one reason for delaying supplier payments.
More than half (60%) of high growth businesses recognise the value of using a credit card to pay overseas suppliers, however many are not tapping into the benefits of timely, efficient payments on their bottom line with only 52% using credit to pay overseas supplier invoices. Incredibly, one quarter (26%) still use cheques as their preferred form of payment and this is 2017.
These companies would be best placed to reconsider credit as a key part of their payment strategy. Improving access to credit can help globally-focused business improve international supplier relationships by streamlining partner payments and access short-term credit, critical in accommodating surges in product and inventory demand.
Payment solutions such as American Express’ AccessLine3 allow businesses to make simple, secure payments to overseas suppliers using their Card. This solution allows efficient management of cash flow and the opportunity to negotiate early payment discounts with their international suppliers.
Many businesses haven’t come to terms with the cost savings that using credit to pay suppliers can bring. If every mid-sized business unlocked preferential payment terms, in line with those that currently do (54%), they could save a total of $3.4 billion in discounts and other related benefits. Alarmingly, almost half of all mid-sized business do not take on the opportunity of discounted invoices (46%), missing out on an average of 3% per invoice – due to cash flow constraints impacting their ability to pay on time.
Juggling payments to international suppliers is further complicated by the volatility associated with foreign exchange (FX).
The simplest risk management strategy for reducing foreign exchange risk is to make and receive payments only in a single currency. However, this is not always possible when companies are incurring costs in local currency, and buying or selling overseas. Sometimes single currency dealings can inflate prices to account for the higher risk incurred.
A new generation of FX credit solutions such as American Express AccessLine4 can help mid-sized companies by paying international suppliers in a timely manner, this gives CFO’s better control of cashflow, especially when goods need to be shipped, and there is a time lag between paying for goods and receiving revenue. The solution is backed by a team of FX experts who can also help in navigating the challenges and risks of fluctuating currencies.
Other solutions such as Forward Contracts can lock in rates for future supplier payments, giving companies certainty in volatile times.
Australia’s small-to-medium sized business sector remains a key pillar of the Australian economy, contributing more than $577 billion5 to the national balance sheet. They are also increasingly looking internationally for the products, components and materials critical to their business, with more than 35% of Australian suppliers based outside our borders.
Delaying payments to overseas suppliers is placing a critical strain on the country’s business relationship with the rest of the world and Australia as the globe’s worst late-payer offender is creating a multi-billion dollar trade headache.
Improving cash flow practices is critical, with a new-generation of credit solutions able to improve supplier relationships and tackle particularly tricky issues such as currency risk.
Over the years we have been working with closely with small-to-medium sized business to develop solutions, such as AccessLine6 , which bring together the strength of a credit solution combined with our FX expertise, to help businesses improve payment and strengthen their business relationships around the world.
3. Consider the appropriateness of International Payments in relation to your individual requirements. Terms, conditions, fees and charges apply. For further information, please refer to the relevant PDS: Telegraphic Transfers. International Payments are arranged through American Express International Inc. (ABN 15 000 618 208 AFSL No. 237996). Incorporated with Limited Liability in Delaware, USA.
5. The industry value added to the economy by the sum of Small and Medium sized business (2015) http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp1516/Perform
6. Consider the appropriateness of International Payments in relation to your individual requirements. Terms, conditions, fees and charges apply. For further information, please refer to the relevant PDS: Telegraphic Transfers. International Payments are arranged through American Express International Inc. (ABN 15 000 618 208 AFSL No. 237996). Incorporated with Limited Liability in Delaware, USA