Firms’ continue to pay the bills which shows that the economy is still performing well.
If firms start taking more time to pay the bills, the various sentiment-based economic indicators – which are flagging slower growth – will be proved right. The surveys get a lot of air-time and continue to point to the good times coming to an end.
Right now, economic growth – and various readings from hard data such as Xero Small Business Insights - continue to track above the more-timely sentiment surveys. Such surveys might be timelier, but they have been giving bad readings for months. The question keeps getting asked, is a turning point for the economy upon us?
Of course, it’s easy to put a glass half empty spin on some numbers, including Xero Small Business Insights ‘getting paid’ metrics.
The average invoice is paid eight days after the due date. That puts pressure on cash flow.
Just under half of all invoices (47.2 percent) are paid after the due date. That’s a huge proportion.
If an invoice is paid late, it is typically really late (23.3 days).
A lot of firms don’t even include an invoice date for payment. Little wonder they take time to get paid!
The glass can be half full.
It would be a miraculous economy if everyone paid their bills on time!
We need to eye the broad trends. The trends across these indicators is one of improvement. The average invoice might be paid eight days late, but that’s down from 8.7 days a year ago. Average days to pay is 25.6 days. It was 26.2 days in September late year. Fewer invoices are being paid after the due date.
Looking at trends in getting paid by payment term (7, 14, 20, 30 and 60 days), there is little sign of a turn.
The trend of improvements in getting paid are inconsistent with an economy heading for a slump. If something ominous was starting to filter across the economy, those indicators would be showing signs of a turn. Turns are typically modest at first but can quickly accelerate. Put simply, the wheels can fall off quickly. So, we need to be watchful.
The average number of invoices per firm has eased up. Fewer firms were cash flow positive in September this year relative to last year, though the change was marginal. It’s a long bow to draw turning point inferences from that though.
We can also infer from the data that:
Firms are working harder to improve cash flow by getting paid quicker.
More work can be done on that front! Cashflow is the life-blood of any business and getting paid helps with cash flow.
Those are healthy signs. Too often people overlook the basic foundations of an economy which is all about microeconomics. That is firm and individual behaviour. Finding ways to get paid quicker is a little thing that helps. Lots of little things can add up.
Could it be that Xero Small Business Insights data, and the various sentiment-based surveys are correct? Could we see slower growth and people still paying the bills?
Firstly, the economy is late in the business cycle and capacity constrained. Skilled labour is harder to find. Xero’s data is showing moderating employment growth and a key reason is that employees are just difficult to find with the unemployment rate falling to 3.9 percent. Growth tends to ease up when firms become capacity constrained and can’t find the staff they want.
Secondly, the various sentiment surveys give respondents three options; are things going to improve, stay the same or get worse? For a lot of firms’ thing are pretty damn good, so the default option becomes stay the same.
Early in the business cycle (economic expansion or upswing stage after a downturn) you tend to see strong growth, but off a low base. It takes time to build momentum and critical mass, and reach a decent level of activity.
Late in the business cycle you see less growth, but a high level of activity. New Zealand is in this position. A levelling out in activity after a good run. People wouldn’t be paying the bills otherwise.
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.