The problem of late payments to small businesses has moved to the fore of Australian politics this year. Policymakers in Canberra, including the Small Business and Family Enterprise Ombudsman, Kate Carnell, 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.
Clearly late payments are a growing concern. So what do we know about payment times to Australian small businesses? Frustratingly little. There are a few surveys, but they tend to poll fewer than 1,000 businesses, and include both big and small ventures. Many of the surveys are conducted irregularly, making it hard to discern trends over time.
We wondered: What if we could follow many of the 500,000 subscribers on Xero every month and track how long they waited to be paid? We set out to do just that.
First, we anonymized and aggregated the details of several million invoices with 30-day payment terms that were issued during the past year so that no names or individual invoice amounts were visible. Then we measured the time between when a bill was issued and when it was paid.
We found that for invoices marked to be paid in 30 days, payment arrived on average in 35.9 days, or almost 6 days late. When we drilled down, the picture was more worrying for small businesses:
- 47 percent of the invoices issued in the past year were paid late.
- When payments arrived past due, they weren’t just a little bit late. On average, they came in 30 days after the due date.
- To put it another way, almost half of small business invoices languished for about 60 days before being paid.
Wait times tend to stretch to their longest in the month of January, based on three years of Xero data. It took an average of 38.7 days for invoices with 30-day terms to be paid in January of this year. Many businesses, big and small, close for the month after Christmas or work reduced hours.
“I always tell my clients, get your invoices in by 10th of December, otherwise, you’re not going to see it until February,” says Mark Lawry, a partner at Suntax, an accounting and advisory firm that serves Melbourne.
June is typically the second-worst month for late payments to small businesses. Some of the delay may be tied to the end of the Australian financial year, says James Solomons, Xero Head of Accounting.
“For large businesses, especially publicly traded ones, it looks good to end the financial year with a healthy amount of cash,” says Solomons. “Some big businesses will push payments they owe in June out to the start of July.”
Some small businesses may also pay their peers late in June, as cash flow can be tight in that month, Xero data shows.
Many small businesses embark on a spending spree as the Australian financial year draws to a close. The government offers an instant $20,000 tax write-off for some capital investments. It’s the last chance for small businesses to claim the cost of new vehicles and office equipment as a deduction for the financial year, says Solomons.
What impact do late payments have on a small business, and what does it mean more broadly for Australia? The most immediate effect of delayed payments is to undercut a small business’s ability to forecast cash flow. About 40 percent of small businesses fail in the first four years, says the ABS. Many of them go under because they don’t understand their financial position until it’s too late.
The practical effect of a 60-day wait for payment can be that a small businesses owners go without a salary so they can pay their employees. Or it may mean owners shed staff, or delay investments that could expand the business.
“At the moment, we’ve got a huge amount of outstanding payments, and many of them are overdue,” says Mandi Gunsberger, founder and CEO of Babyology. “The problem is the unpredictability. You know you’ve got a certain amount of money going out on a certain date, but you have no idea how much is coming in because it’s out of your control.
“I have a mortgage and three small kids,” says Gunsberger, whose Babyology website serves a community of over 1 million parents and parents-to-be. “I can’t tell you how stressful it is when I also have to carry a payroll for 15 people and their families.”
She estimates she spends about half a day each week chasing payments. That’s after her CFO and his staff have failed to extract payment. She first gets up to speed on their debt-collection efforts, then makes calls to the companies. “Chasing money costs money,” says Gunsberger.
On a national level, late payments strain one of the most important elements of the Australian economy. Small businesses generate about one-fifth of GDP and they employ almost half of all workers, based on government figures. As voters, they are a substantial bloc. In aggregate there are about 2.1 million business entities in Australia, which would represent households containing about four million people, including up to two million voting adults, according to an analysis by demographer Bernard Salt.
To be sure, it’s not all bad news on the payments front. The average number of days overdue for late payments has fallen from mid 2015, when it was at 41 days. While there is probably no one reason for the decline, we’ve seen that businesses on Xero make heavy use of online tools. And an analysis earlier this year suggests Xero online invoices get paid 33% faster than traditional invoices.
In the meantime, it will be interesting to watch in the months ahead to see if big businesses’ voluntary move to 30-day payment times has a measurable effect on payment times from July.