Late payments. Two words that have the power to unsettle most business owners – sometimes even to the point of insolvency. So why is it that late payments are still so pervasive in the small business landscape, and what is being done to address this issue?

We gathered together, in one room, four fearless small business leaders, who represented a range of industries and business models across the small business spectrum. By combining their anecdotal insights with Xero’s anonymised real-time data from hundreds of thousands of small businesses, we laid bare the late payment landscape in a very frank and honest discussion.

Who’s who?

Meet the four founding members of Xero’s small business advisory panel.

  • High-profile digital media advisor Mandi Gunsberger, who runs the nationwide digital publishing company Babyology.
  • James Begley, founder of Pickstar, the uber of sports celebrity speaker engagements.
  • Pippa Oostergetel of Squeak, a retail business specialising in digitally printed scarves, and recent recipient of Xero’s Cloud Street package
  • Mark Lawry, a data-driven partner at Suntax accounting firm in Melbourne.

Where do each of you stand when it comes to late payments?

Mandi, Founder and CEO of Babyology: The early days were amazing for us at Babyology, because our business model was largely based on requiring prepayments – and the amounts were much smaller. But the ball has shifted as we’ve grown over the past 10 years. Payment is now on a much larger scale, and it’s the creative agencies who set the terms– which can mean a 30, 60 or 90-day turnaround.

Pippa, CEO of Squeak: My customers now pay upfront, so I avoid late payments this way. A lot of them initially said, ‘We don’t work that way’, so I had to make a gut decision about how badly I wanted their business. I pretty much just started making prepayments part of my terms and conditions. Now I wait to get paid for the product before I send it out in the post. That means I do have orders that don’t get filled. I’ll hold that stuff for two weeks – and if I don’t get paid in the two weeks, then it goes out to somebody else.

James, founder of Pickstar:  It’s very hard, very hard, to get money in, as a lot of the big agencies we work with pay 30 or 60 days late. Even then, we’re lucky if they pay us at this point. That of course affects our ability to pay our suppliers on time. The way it works in publishing or media is that we might be booking something today, but we only see the money in four or five months. We need to have offset accounts in place to counteract the payment lag.

Xero’s data from over 1000 small businesses shows that the longest delays in invoice payments are over December, with cash flow at an annual low in January. What do you wish you knew about late payments before you started your business?

James of Pickstar: I wish I had known about the inevitable summer downtime. When I started, business was quiet in December. I worried about it, wondering if I had got my model all wrong. Then it happened again the next year, and it wasn’t until year three that I realised I’d need an annual buffer to cover this period. So you learn to batten down the hatches. Business effectively closes in Australia from December through to Australia Day – so you better have a late payment buffer in place for any invoices you send during this time.

Mark of Suntax: I always tell my accounting clients, if you don’t get your invoices in by 11 December each year, there’s a good chance you won’t be paid till February. I wish more small businesses understood this.

James of Pickstar: I agree. In fact now I just work extra hard before December, as I know I won’t get paid for months unless I get those invoices in before December hits.

Who do you think is slowest when it comes to paying? Small or big business?

Mark of Suntax: For us, it’s small business clients who are generally slow to pay. To be honest, we know their situation anyway, given we are their accountants. We know that a lot of small businesses aren’t generally cashed up, so they’re the ones that tend to be slower at paying.

James of Pickstar: I have to agree and say that most of the bigger companies have good systems in place and seem to be pretty good at paying us – whereas the smaller businesses may delay payment. We’re the first to put our hands up here, as we haven’t always paid everyone on time. But we’re not talking about hundreds of thousands of dollars in our case, so the delay doesn’t seem to be as big of an issue for us and our suppliers – perhaps when compared to other companies.

Pippa of Squeak: I’m not at the stage where I’ve dealt with a big business, so for me, it’s usually the smallest stores that struggle to pay me on time. These are the stores that want the stock to sell, but haven’t got the money to buy it. I get this, but it means wholesale isn’t as viable for my business, when compared to retail.

Mandi: For us, the larger clients we work with can sometimes pay their invoices late, which can be stressful. Especially when you’re waiting on large payments, and salaries need to be paid. We try to have a cash buffer of three months minimum in place to avoid the deficit. But we can never afford to take our eye off the ball, as that buffer can go quickly.

What do you think lies at the heart of the late payments issue?

Mandi of Babyology: I think that small businesses need more support to help them with their own supplier payments. We’re now technically a medium-sized business, yet we still struggle for financial support some 10 years down the line. We’ve gone to all the banks for funding to help with cash flow but we have been more successful with other funding, and not the traditional institutions.

Cash flow can be a challenge. Sometimes, it requires us to seek external investment elsewhere to support our own outgoings.

James of Pickstar: I like the idea of the government mandating payments to 30 days across both small and big business. So, while we’d be required to pay suppliers in 30 days, we could generally do that if our clients were likewise mandated to pay us within the same time period.

Mark of Suntax: I think big business like Coles and Telstra vowing to pay within 30 days as of 1 July 2017 has really helped send a message out there to other big businesses.

James of Pickstar: And I think there’s a need for the small business owner to be able to compartmentalise their seasonal payments as well. For example, we sometimes get paid for talent fees nine months before an event, but we know to put that in an offset account and keep it separate. It’s not our money until the project is completed. Otherwise upfront payments can cause nearly as many headaches as late payments – they can become a liability.

Did you know?

Xero Small Business Insights provides a snapshot of the sector’s health, updated monthly. Its metrics are based on anonymised, aggregated data drawn from hundreds of thousands of our subscribers. The result is a close-up view of business conditions across hundreds of thousands of businesses.

Xero’s real-time data unlocked the following insights as of June 2017.

  • The average small business is paid in 36 days
  • Just 52% of business owners were cash flow positive as of June 2017
  • 46 percent of the invoices issued in the past year were paid late.

Given Xero has one of the richest data sets into small businesses in Australia, it has unique insights into the challenges that small businesses are facing. By using this dataset to change the mindsets of businesses, big and small, and government, Xero can help to make the lives of small businesses better.