Xero flags rising payment delays for US small firms

Xero reported a rise in payment delays for US small businesses in the March quarter, based on data from more than 32,000 businesses on its platform.

Sales continued to grow during the quarter, but more slowly than the long-term trend. Year-on-year sales rose 2.5%, below the 5.4% long-run average, according to Xero Small Business Insights data from businesses tracked since January 2017.

The result was a mixed picture for smaller companies. Revenue growth remained positive and improved throughout the quarter, but longer payment terms indicated mounting cash flow pressure before the full impact of higher fuel and input costs was felt.

Monthly sales growth strengthened as the quarter progressed, rising from 1.3% year on year in January to 2.6% in February and 3.6% in March. Even so, the quarterly result suggested modest demand rather than a strong rebound.

Payment strain

Payment times worsened after improving through much of the previous year. Small businesses waited an average of 28.8 days to be paid in the March quarter, up from 28.3 days in the previous quarter.

Late payments also increased, with invoices paid 9.0 days late on average, compared with 8.4 days in the prior quarter.

For many smaller firms, even a slight decline in payment discipline can tighten working capital. Slower receipts can make it harder to cover day-to-day costs, fund expansion, and absorb sudden increases in operating expenses.

"While small business sales are holding steady, there are early signs that conditions are becoming more challenging," said Louise Southall, Economist at Xero.

"Payment times are starting to shift up again, and with fuel and input costs rising, many businesses are likely to face increased pressure on cash flow in the months ahead. The pace at which these costs are building is expected to make it harder for small businesses to adjust."

Cost pressures

The payment trends come against a sharper rise in consumer prices, led in part by fuel. Consumer prices rose 3.3% year on year in March, up from 2.4% in February, the largest increase in nearly two years.

Gasoline prices climbed 21.2%, accounting for roughly three-quarters of that increase. Higher fuel prices typically flow through supply chains, raising transportation, shipping and broader input costs for businesses already operating on thin margins.

Those effects were still in their early stages in the March quarter and had not yet been fully reflected in small-business performance. That means the current sales and payment figures may understate the strain many firms could face as cost increases spread more widely through the economy.

Businesses in fuel-intensive sectors and regions that are more exposed to transportation costs are likely to face the greatest pressure. Rising operating costs can also weaken consumer spending, adding another risk for small firms that depend on discretionary demand.

Tax relief limits

Xero also pointed to tax refunds as a possible source of temporary support, though the benefit may be limited. It cited Tax Foundation estimates of about USD $1,500 for small businesses and USD $2,300 for individuals.

That support may do little more than offset rising expenses if fuel, shipping and materials costs keep climbing. In that case, refunds would be less likely to translate into new hiring or business expansion.

The data highlights a gap between headline sales growth and the underlying financial position of many businesses. On the surface, positive sales suggest stability, but worsening payment times and inflation in key cost categories indicate conditions may be less secure than they appear.

Andrew Kanzer, Managing Director for North America at Xero, said smaller businesses needed to focus on liquidity and planning as conditions changed.

"Small businesses are navigating an increasingly complex environment, where conditions can shift quickly," Kanzer said.

"In times like these, it's important to focus on the areas you can control, like managing cash flow, staying on top of incoming and outgoing payments, and planning ahead for cost changes. Businesses that maintain visibility and act quickly will be better positioned to manage ongoing uncertainty."