Getting paid on time can be a major challenge for small business. The resulting issues with cash flow can stifle growth, and even put entrepreneurs out of business.
For a long while a small business had no way to track its real-time financial position, or to sync its accounts with banks, bookkeepers, accountants and add-on apps. A lack of connectivity meant business owners often made decisions with incomplete information.
This connectivity has vastly improved but Steven Molotsky, Director at MTM Accounting, still believes that some of the biggest challenges faced by a small business are created as a result of late payments.
“Despite credit terms and common association with the 20th of the following month payment date, it is now unusual for that date to be adhered to. Businesses seem to seek to extend the payment period to the last day of the month or later. This creates a loop where the receiving business then has to extend its payment cycle to account for not having yet been paid for its work and so on. This can also lead to greater costs, as overdrafts and other financing arrangements are required, incurring interest, and creating stress for the business owner. Late payments affect small businesses harder, as they have fewer reserves to sustain themselves while waiting to be paid. The cycle would be greatly improved if payment terms could be re-set to their established payment dates.”
What we can see
With more than 300,000 Kiwi subscribers in New Zealand, our close relationship with small businesses gives us a unique understanding of their challenges. This week, we have released some of our findings with Xero Small Business Insights.
This dashboard, updated monthly, provides real-time insight into the health and conditions of small businesses in New Zealand. The snapshot tracks the performance of small businesses across five key pillars: getting paid, cash flow, hiring people, trading overseas and the adoption of cloud technology. The metrics are based on anonymised, aggregated data from hundreds of thousands of small businesses that use our accounting platform in New Zealand.
Our data shows us that over the period March 2017 - March 2018, 30-day invoices in New Zealand took an average of 34.7 days to be paid. The longest payment terms were in March 2017 (38.5 days) and May 2017 (36.4 days).
Interestingly, December 2017 was the best month for getting paid, where it only took 32.4 days. It’s likely we can thank the Christmas break and Summer vacation for that, as it is reasonable to assume that people sort out their finances before going on summer holiday so they do them early.
Comparing payment trends on a global scale
Any delay in paying invoices can have a significant effect on small business. But the New Zealand picture is a lot better than in Australia or the United Kingdom, where Xero Small Business Insights are showing a strong correlation between late payments and cash flow pressures among small business.
In the United Kingdom, and despite continued pledges and policies to reduce late payments for the nation’s small businesses, more than half (52%) of invoices were paid late in 2017. Xero Small Business Insights there shows that in 2017, 30-day invoices were on average paid after 40 days, nationwide.
In Australia, 42 percent of invoices are paid late. Policymakers in Canberra, including the Small Business and Family Enterprise Ombudsman, have called on lawmakers to mandate 30-day maximum payment times for business-to-business sales. Coles, Telstra and Woolworths pledged to pay suppliers as quickly as 14 days starting in July.
Counteracting late payments
While the picture is pretty good in New Zealand, there are some things that can be done to make it even better. For example, we know that using the invoice reminder feature within the Xero platform has a positive impact. In the first 25 days after payment is due, overdue invoices with reminders get paid an average of four days sooner that those without.
This article was prepared by Xero using Xero Small Business Insights data, for the purpose of informing and developing policies to promote small business in New Zealand. It contains general information only and should not be taken as taxation, financial, investment or legal advice. Xero recommends that readers always obtain specific and detailed professional advice about any business decisions.
Download the Xero Small Business Insights summary hereDownload PDF