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Xero data reveals late payments are a prime cause of cash flow crises for SMEs.
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Overdue invoices ‘cost small business $1.1bn a year’
08 September 2022
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Overdue invoices are costing small business $1.1 billion a year and waiting times for payment have reached an average of 6.4 days, according to the latest report from Xero.
It found that almost half of all invoices are paid late — one in 10 by more than a month — and said overdue payment is one of three prime causes of cash flow crises, or “red flags” for small business, along with rising expenses and seasonal slowdowns.
Released during the Xerocon Sydney conference this week the report, Crunch: Cash flow challenges facing small businesses Part II, coincided with the launch of an update to Xero’s cash flow forecasting tool Analytics Plus.
Xero said the update helped manage expected payment dates for overdue invoices and bills to simplify cash flow forecasts and give businesses a window on their financial health.
Xero chief product officer Anna Curzon said further updates, due soon, would also plug in BAS, PAYG and payroll payments to Analytics Plus.
“Every small business owner would love a crystal ball to predict the future,” Ms Curzon said. “By leveraging AI, we’re able to provide small businesses deeper insights with a 90-day window into the future that is unique to them.”
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The Crunch report suggests that to avoid a cash flow crisis, SMEs adopt online invoice payments and work with an accountant or bookkeeper to stay on top of government assistance programs.
Xero economist Louise Southall said the $1.1 billion cost to small business was calculated using public sales data and payment times directly from the Xero platform.
“We look at the national sales figures for the whole of Australia, what’s the small business component of that, what the 6.4 days represent in terms of sales, and then overlay an interest cost,” she said.
Xero chief customer officer Rachael Powell said that substantial cost imposed a huge burden that went beyond the small-business itself.
“Late payments create a flow-on effect for small businesses, creating unnecessary accounting complications and threatening owners’ ability to meet their own obligations — such as rent or wages — in time,” she said.
“If small businesses and their accounting partners and governments can actively look out for these red flags in their financial data, they’ll find it easier to work together on ways to anticipate cash flow crunches and avoid them with better planning and more timely action.”
The report found businesses with 60–80 per cent of their invoices paid late experienced 17 per cent more incidents of cash flow crises — where outflows exceed inflows — compared with those paid on time.
Xero managing director for APAC, Joseph Lyons, said late payments were just one factor causing cash flow problems for small businesses along with sharp rises in rent, energy, fuel and payroll costs.
“These pressures are unlikely to subside anytime soon, making cash flow stress one of the big issues for small businesses in the coming months,” he said.
“In this climate, it’s more important than ever that we take serious action in cracking down on avoidable late payments and equipping small businesses to build cash reserves for those leaner months.”
Xero data showed rental costs have rose 9 per cent year-on-year and payroll expenses 13 per cent in the last quarter of 2021 while during the January and February holiday season, revenue drops nearly 20 per cent for the average Australian small business.
The report was prepared using Xero Small Business Insights data from over 200,000 businesses across Australia, New Zealand and the UK along with public data and Accenture estimates.
Xerocon Sydney drew together more than 3,000 Xero users and app partners from Australia, New Zealand and Asia.
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