As still-high inflation, slowing growth and other economic headwinds buffet organizations in 2023, US small businesses are feeling the impact of weakening consumer spending. Inflation is impacting their customers, who are dealing with higher cost-of-living pressures, as wage rises fail to keep pace with the impact of rising interest rates, skyrocketing rents and increasing prices for goods and services.
For small businesses, weakening demand is an obvious problem. But another potential pitfall small business owners sometimes overlook is the negative impact of the late payment of their invoices. Small businesses don't just service households, but they also work with other small businesses, larger businesses and governments.
Many of these bigger customers receive invoices to pay, rather than paying immediately for goods and services. When they are late in paying these invoices, it makes it harder for small businesses to manage their cash flow.
Late payments have been an issue for some time. According to the latest “Xero Small Business Insights” data (XSBI)—which aggregates and anonymizes data from tens of thousands of small businesses in the US and Canada—small businesses were paid 7.2 days late, on average, in the three months to September.
Moreover, the average small business waited almost an entire month (26.4 days) between sending an invoice and receiving payment over the same time period.
Late payments have a significant impact on small businesses
When small businesses are paid more than a week late and must wait nearly a month for payment, this makes it more difficult to manage cash flow. Business owners face the difficult challenge of accurately calculating cash on hand and predicting future cash flow. This can make it incredibly challenging to plan investments in the business (hiring, technology, etc.), make payments to suppliers and even meet payroll.
A business owner might even be forced to secure a bridge loan—using the company’s assets as collateral—to make necessary payments while waiting to be compensated by customers/clients. In a rising-interest-rate environment, this is one option that few owners want to contemplate.
For accountants and bookkeepers to assist in helping their small business clients, they need to ensure they have a steady grip on the company’s cash flow and can use a range of strategies to ensure payments are made in full and on time. Tools that can help a small business be paid on time include using apps that send out automatic invoice reminders or offering instant electronic payment options.
Accountants and bookkeepers can also help their small business clients identify customers that don't have a good payment track record and work out ways to overcome this, such as offering them an early payment discount. If a client shows a pattern of paying later and later over several cycles, maybe it is time to worry about their long-term solvency and alter the payment terms to decrease the client's financial risk.
Small business sales growth records slowest two months since the start of 2021
Although sales recorded growth of 4.5% year over year (y/y) in September, this was mostly due to higher prices, rather than small businesses selling more goods and services. Using the CPI (+8.2% y/y) as a proxy for prices implies small businesses sold 3.7% fewer goods and services than they did compared to September 2021.
As consumers face higher prices across the board on rent, food, energy prices, and more, they are likely to have less disposable income to spend in other outlets, like small businesses.
The year ahead is likely to have ongoing challenges for small businesses and accountants and bookkeepers will be critical in helping them prepare for what’s to come.
Louise Southall is a Xero Economist.
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