Late invoice payments cost small businesses $456 million per year

Xero economist Louise Southall. Photo / Supplied

Data from small business accountancy firm Xero shows late invoice payments are costing small firms a combined $456 million each year.

The average small business in this country gets paid 6.3 days late, and last year almost half of all invoices issued were paid late - with 8 per cent paid more than a month after they were due.

New Zealand small businesses that received between 60 - 80 per cent of their payments late were almost 20 per cent more likely to experience cash flow crunches when compared to firms whose invoices were paid largely on time, the software platform outlined in the second part of its late payments report, Crunch: Cash flow challenges facing small businesses.

Xero New Zealand country manager Bridget Snelling said delays in making repayments could often make the difference between a small business remaining open and operational, or making tough decisions about the future viability of the business.

Many small businesses were still feeling the flow-on effect of Covid-19 lockdowns and the subsequent slowing of activity, she said.

"The pressure of expenses is one of the biggest stressors for Kiwi small business owners, with cash flow already continuing to be impacted by inflation and a decline in discretionary spending as consumers tighten the purse strings.

"It is essential the Government and the business community tackle avoidable cash flow stressors like late payments and relieve expenses pressures where they can."

In 2020, the average late payment time was 8.2 days; in 2021, that improved to 6.3 days, and remained at that level until February 2022 (data ends then).

Xero found that reducing late payments to affect less than 20 per cent of invoices could reduce negative cash flow months by up to 19 per cent.

Xero economist Louise Southall said late payment of invoices could be costing small firms a lot more than $456m annually - pushed higher by interest rate increases and any increases to the number of days of late payment.

To work out the cost late invoice payments were having on the small business economy, Xero took the number of average late days in February (6.3 days) and converted that into a dollar figure by using national data of sales made in those 6.3 days by small businesses in New Zealand. It then applied an interest rate cost, as the business did not have this money in its account, or they have to borrow that money for that shortfall period.

"What we wanted to do with this estimate was to show that actually there is a cost to late payments, because that money is not sitting in the bank accounts of the small businesses, it is sitting in the bank accounts of the people who owe them money, and there is a cost to that situation even if the bills do eventually get paid," Southall told the Herald.

"Having dollar figures attached to it does seem to focus people's attention and [hopefully makes it] hit home that the number of days does have an impact on small businesses."

Southall said it was encouraging to see that the number of late payment days had not been increasing in recent months through 2022. "It is a positive sign - it suggests that we're not seeing a blow-out in late payment times as the cost of living increases and interest rates rises are emerging."