Timely receipt of payment can often mean the difference between thriving or just surviving for many SMEs which dependent on income generated from supplying the government with goods and services.
Delays in receiving payments often mean SMEs may experience disruptions to their day-to-day operations and growth of their businesses, and possibly even the termination of continued business activity.
South Africa has a 30-day payment rule, set out in the Public Finance Management Act (PFMA) and enforced by National Treasury, which explains that national and provincial departments should pay suppliers within 30 days of receiving a valid invoice.
National Treasury has also emphasised that paying on time is not just good practice but a legal obligation. Their compliance reports note that failure to pay suppliers within 30 days negatively affects service delivery and places unnecessary financial pressure on small businesses.
According to a recent study conducted by the Department of Planning, Monitoring and Evaluation (DPME), the amount of time SMEs that supply goods or services to the government wait to receive payment can be between 60 and 120 days.
The report also reveals that such delays will create negative impacts on SMEs, for example, regularly delaying payment to employees, servicing their current debt obligations or purchasing inputs or materials necessary to perform under the contracts they entered into with the government.
The report also reveals that common issues include invoice backlogs, slow approvals, verification challenges, and budget alignment problems.
The Small Business Institute (SBI) describes cash-flow disruption as one of the main reasons SMEs fail. SBI CEO John Dludlu said late payment, especially by the state, has a devastating knock-on effect on small firms that do not have cash reserves.
“To manage these gaps, many SMEs turn to banking and alternative finance solutions,” Dludlu said.
He advised that overdrafts, offered by banks such Standard Bank, Absa and Nedbank , can help cover short-term expenses, though they are usually expensive and intended for temporary use.
“Another popular option is invoice finance, also called invoice discounting or factoring. This allows SMEs to access most of their invoice value immediately instead of waiting months,” said Dludlu.
According Swoop Funding South Africa, invoice finance enables businesses to unlock working capital tied up in receivables rather than waiting months for settlement. Economist Professor Raymond Parsons, former chief economist at Business Unity South Africa (BUSA), also added that small businesses operate with very limited cash buffers, so delayed payments, particularly by the public sector, quickly turn into job losses, stalled projects and business failures.
To understand more about how government delay and government non-payment affect small/micro/medium enterprises, you can download the full report from the Department of Planning, Monitoring and Evaluation.
70008-20200630 Research on Late Payment of SMMEs V03_compressedEmily@vutivibusiness.co.za
