The most recent Small Business Insights (SBI) data has arrived, and it gives a picture of what’s typically one of the most difficult months for an Australian small business owner: January. We know from past trends that the first month of the year is when payment times stretch out to their longest and cash flow takes a precipitous drop.
This year, just 50 percent of small businesses on Xero were cash flow positive in January, down from 56 percent just a month earlier. This is a seasonal change we see repeatedly, and the previous January’s figure was slightly worse at 49%.
Business owners tell us that after the rush of Christmas sales in November and December, money becomes tight in the first months of the year. Inventory must be replenished, which eats into cash reserves. Many customers also take vacations, to say nothing of the business owners granting themselves a well earned holiday.
January’s business conditions may also partly reflect what some economists are now calling a “per capita recession.” Figures released by the Australian government last week reveal GDP shrank on a per-person basis for two straight quarters through December. It’s the first time that’s happened since 2006. While the indicator isn’t as serious as a proper recession – which Australia hasn’t seen since 1991 – it is a worrying signal.
This downturn in economic activity is evident in not only in cash flow but in payment times for invoices. It took an average of 36 days for a small business to be paid on an invoice with 30-day terms in January, according to Xero data, which means businesses were paid almost a week late. While that’s far from ideal, it’s a marked improvement from the same time a year ago: we saw in January 2018, businesses waited an average of 38 days.
These are of course average figures for all businesses. Which sectors truly suffer when it comes to late payments? And are there any businesses that actually get paid early?
A closer look at the Xero SBI data shows small businesses in two sectors fared the worst when it came to getting paid on time in January: manufacturing (average 42.4 days), followed closely by transport and warehousing (41.5 days).
The sector enjoying the shortest average payment time was retail at 28 days – or one day early in January
What causes these disparities in payment times? Experts in credit reporting suggest two factors may partly explain the differences.
When dealing with larger customers, some retailers offer rebates if payment is received early. These retail agreements can speed payment times in some cases, according to CreditorWatch. The credit reporting bureau serves over 50,000 customers, including many small and medium-size businesses, and it has an app that integrates with Xero.
In industries such as transport and manufacturing, larger businesses dominate. They tend to have credit departments to chase late payments and legal departments to take court action. Many little players lack these advantages.
“Smaller businesses are often are run off their feet,” says Patrick Coghlan, managing director at CreditorWatch. And in an industry where chasing payments is the norm, those who lack the resources to do so may be paid last.
Payment times and cash flow aren’t the only indicators affected by the seasonal slowdown early in the year. Employment typically contracts in January as casual and part-time workers hired ahead of Christmas depart, and 2019 was no exception. Overall employment at small businesses on Xero fell 3.4 percent month on month, led by a 7 percent drop in casual workers. Part-time employment slid 2.1 percent while full-time declined 0.5 percent.
If past years’ trends hold true, the SBI numbers for February and March should show a recovery in employment, a rebound in cash flow, and a reduction in payment times. Whether that holds true amid a “per-capita recession” remains to be seen. Stay tuned here at Small Business Insights for the latest updates.