Cashflow and getting paid is the life-blood of any small business.

They are also key economic indicators as they represent what is happening on the ground.

Downturns are associated with pressures on cash flow and delays in getting paid.  When a downturn hits, everything slows as less business is done, people take longer to pay and cash flow pressures mount.

Xero’s Small Business Insights data challenges the notion that the economy is in a downturn.  

That’s a term that is being used too frequently and risks becoming self-fulfilling.  Momentum might be slowing but slowing momentum when you are hitting capacity constraints is not a downturn though businesses are obviously eying a lot of risks both offshore and onshore.

The statistics are telling.

Cashflow numbers are better than a year ago. Last May 41.1 percent of firms were cash flow positive. The equivalent in 2018 was 42.8 percent. May is a poor cash flow month because of provisional tax payments but an uplift is still notable. Last June 48.5 percent of firms were cash flow positive.  In June 2018 49.4 percent were.

Of course, there is some seasonality about the figures, but the key message is that cash flow is better and not worse compared to a year ago.

The trend in getting paid is also one of improvement across four of five payment terms.

SBI Insights Chart

That’s a long list of improving trends as opposed to deteriorating ones!

Now we need to acknowledge that comparisons with a year ago can miss turning points. As Xero’s Small Business Insights data gets more observations we’ll be able to seasonally adjust the data and look at more timely signals.

It may also be that firms are working harder to manage cash flow and ensure they are getting paid on time. On that front, more work could clearly be done! The average invoice is overdue by 8.3 days though which is also down on a year ago where is was 8.8 days. Every small nudge in the right direction helps.

We could also postulate that Xero’s Small Business Insights dataset might be out of step with the general economy. There is some potential validity in this. They are likely to be more inclined to be embracing technology and on top of various business metrics.  Small to medium sized businesses are going to have a huge role to play in the transition to a new economic model the government talks about. Small businesses are a key part of the economy but are going to need to be an even bigger engine of growth. It is notable that employment growth according to Xero’s Small Business Insights has been outstripping employment growth across the total economy for some time, though even Xero’s employment data has slowed of late.  

If this is the case, then the data will take on increased importance over the coming years in terms of the New Zealand economy’s transition to a new economic model. It will be a mechanism progress can be tracked.

The construction sector is receiving a lot of attention.Xero’s Small Business Insights data shows the construction sector is getting paid quicker than for the equivalent months last year. Construction is a proliferation of small businesses. They are busy, and people are paying to get the work done. Cost overruns and other issues may be problematic for some in the construction industry, but the small business set looks to be doing ok.

Of note is that the average days to pay has been rising in the accommodation and food services industry, and rental hiring and real estate industries. These trends need watched.

Average days to a pay also differs massively by industry. It can range from the low 20’s to around 40 days. For some sectors there appears massive scope to follow others and tighten up on payment terms and improve cash flow and liquidity.  

 

This article, including the insights and analysis contained within it, was prepared by Economist, Cameron Bagrie with the support of Xero through Xero Small Business Insights data. All data used is anonymised and aggregated. 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.


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