Receiving payment for goods or services in a timely fashion is one of the big pitfalls for small businesses. It can also contribute to a ‘trickle-down effect’ across the small business landscape where delays in payments prohibit other small firms from getting on with the business at hand. Taking June as the latest example, Xero Small Business Insights shows that on average invoices processed through the Xero platform were eight days late.
With a vast number of small businesses using our services, Xero is in the unique position of capturing and providing insights into the health and conditions of small businesses in New Zealand. The metrics are based on anonymised, aggregated data from hundreds of thousands of small businesses that use our accounting platform in New Zealand.
One of those metrics is looking at whether businesses get paid on time and this time round we have expanded the metric to include not just those invoices with 30 day payment terms (as we reported on last time) but all invoices that pass through our platform.
Invoices with shorter terms experienced significant overdue payments - for example, invoices with 7 day terms received payments within 17.3 days on average, and invoices with 14 day terms received payments within 22.2 days on average. However, an interesting point to note is that businesses whose payment terms were longer (60 - 90 days) were more likely to be paid within the specified period.
What does this mean in real terms? Late payments can severely disrupt a small business’s cash flow and contribute to a vicious cycle, which can be hard to break, particularly where those delays occur between small business owners. This can then in turn impact productivity, lead to inabilities to fill orders, delays in hiring staff as well as adding to the overall administrative burden and cost of chasing payments.
Rachel Lewis, founder of the Women’s Entrepreneur Network says that getting paid on time is a challenge for those in her community.
“The common theme is that for small businesses getting paid on time can still be problematic. In some circumstances smaller invoices are being written off to save time and late payment of larger amounts (often from bigger business) can result in serious cash flow issues.
Where possible small business owners are mitigating the problem by requiring payment or part payment up front, strengthening payment terms and conditions and utilising software such as Xero to manage reminders more efficiently.”
Some industries experience later payments more than others. Take for example the mining and manufacturing industries, both of which don’t receive payments on average until well over 30 days. The longest payment periods however are experienced by the wholesale trade industry, which includes wholesale grocery, liquor and basic material supplies to a large number of other small businesses. It took businesses within this industry on average 38.3 days to receive payment in full, compared to industries like the administrative support services, whose invoices took 24.1 days to be paid in full.
While small businesses have limited control over the timely receipt of payment, Xero users can utilise the invoice reminder feature within the Xero platform so a reminder is raised when there are outstanding invoices. In the first 25 days after payment is due, overdue invoices with reminders get paid an average of four days sooner that those without. We also can see that invoices paid via Stripe or Paypal (in conjunction with the Xero platform) are paid 10 days faster than other invoices. This makes a very attractive proposition for small businesses to embrace new technology for quicker payments.
It’s also encouraging to see large organisations like Fonterra reconsider lengthy payment terms. The company recently rolled back it’s 90 day payment terms and changed its policy so that suppliers with contracts of up to $300,000 per annum, will be paid on the 20th of the following month. It would be good to see more of New Zealand’s big firms follow suit, introducing prompt and timely payment policies that can make a real difference to their day-to-day operations and long-term viability of small business.
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.