If it feels like your customers are taking longer to pay, you’re not imagining it. CreditorWatch’s September Business Risk Index shows only 48% of invoices are now paid by their due date, down from 58% a year ago. One in 10 invoices is more than 60 days overdue which is double last year’s rate and the highest since April 2018.
For any small business that sells on terms, that matters. The moment you finish the job or hand over the goods, your customer’s cashflow problem becomes yours.
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Late payment comes before the bad news
Trade payment defaults (where a business formally records an unpaid debt against another business), rose 26.1% over the year to September. CreditorWatch CEO Patrick Coghlan told Accounting Times slow payments are “certainly leading indicators of future pain, insolvency, and delinquency”.
Some industries are feeling it more than others. In construction, the share of invoices paid more than 60 days late has gone from 6% to 13% in a year. Food and beverage services is the worst, with almost one in five payments (19%) more than 60 days overdue. Transport, mining, manufacturing and retail have all jumped to between 11% and 12%, up from 4% to 6% a year ago.
If those are your customers, your risk is higher than average.
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The timing is terrible
Plenty of businesses have a September quarter BAS due on October 28. Then comes Christmas, when a lot of customers close from mid-December to mid-January, which means an invoice sent on December 1 on 30-day terms can easily turn into late-January cash.
Meanwhile, wages, leave loading, superannuation, rent and suppliers still need paying. With payday super in place since July 1, super now goes out with every pay run too, so there’s less room to juggle things around.
There’s also a GST catch that surprises people. If you account for GST on a non-cash (accruals) basis, you pay the GST on an invoice in the BAS for the period you issued it, whether or not your customer has paid you. Businesses with aggregated turnover under $10 million can generally choose to account on a cash basis instead, which is worth a conversation with your accountant if your debtors are blowing out.
And if a debt does go bad and you’re on the non-cash basis, you can claim the GST back as a decreasing adjustment once you write it off, or once it’s been overdue for 12 months or more. For income tax, a bad debt is generally deductible if you’ve already included the amount in your income and you write it off before June 30. Both rules reward keeping your debtor ledger clean, rather than leaving dead invoices sitting there for years.
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What to do now
- Run your aged receivables report weekly. Monthly is too slow when things move this fast. Sort by the oldest and the largest.
- Invoice the day the work is done. Every day you wait to invoice is a day added to your payment terms.
- Tighten terms for new customers. Fourteen days instead of 30, and deposits or progress payments on bigger jobs.
- Make paying you easy. Add a pay-now link to every invoice, or set up direct debit for regular customers.
- Automate your reminders. Send a friendly reminder a few days before the due date as well as after it. Most accounting software does this for you.
- Pick up the phone. By 30 days overdue, an email reminder is easy to ignore. A call usually gets you a date.
- Check before you extend credit. This should include a signed credit application, an ABN lookup and, for bigger accounts, a credit check and a director’s guarantee.
- Protect your goods. If you supply goods on terms, a retention of title clause in your terms plus a registration on the Personal Property Securities Register (PPSR) can be the difference between getting your stock back and being an unsecured creditor if the customer fails.
- Watch for warning signs. A customer who always paid on time starts slipping, offers part payments, keeps promising ‘end of the week’, or suddenly changes who you deal with. CreditorWatch also reports record ATO tax defaults, and tax debt is often the first thing to slip.
- Know when to stop supplying. Keeping a slow payer happy by giving them more credit only increases what you stand to lose.
Your debtors are shown on the balance sheet as an asset of the company, and being owed money feels a lot like having money, but it isn’t. I’ve seen good, profitable businesses run short of cash because a couple of big customers paid late at the wrong time, and the profit on paper didn’t pay the wages.
The good news is this is one of the most fixable cashflow problems you’ll have. Most of the list above takes an afternoon to set up and a few minutes a week to keep going. Do it before the Christmas shutdown, and you’ll start the new year with cash in the bank instead of a pile of follow-up emails.