Spotlight on how long large businesses take to pay their bills

Wednesday 22 February, 2023

“Another day, another dollar”; the age-old saying that keeps Kiwis showing up at work to earn their living wage in times where the cost of living is at a record high. For small business owners though, this saying sounds more like “Another day, another 23.8 days until another dollar.”

The issue for small businesses:

Late payments and poor payment practices by large businesses have left many small business owners out of pocket and in the dark. This has resulted in 87 percent of small business owners experiencing disruption to cash flow due to late payments, with 46 percent dipping into their own savings to make ends meet. This, along with New Zealand’s inflation rate at 7.2 percent, a 32-year high, has resulted in businesses feeling the pinch more than ever before.

Poor transparency in payment practices has resulted in increased time and resources being spent on debt collection, difficulties with capital investment and the hiring of new staff, and an increased risk of insolvency. Small business owners also tend to avoid demanding payment due to fear of damaging their relationship with suppliers.

What is the purpose of the Bill?

The Bill will require large businesses to publicly disclose their payment practices, meaning the policies which they follow when paying invoices. A large business is a business with annual revenue greater than $33 million for two or more consecutive years.

The Government is hoping this information will reduce the uneven bargaining powers between large and small businesses and will help small businesses to decide which large businesses they want to work with to avoid slow payers. Ideally, having more information about payment practices will prevent small businesses from having to accept unfair payment practices from large businesses in “take it or leave it” situations.

As required by the Ministry of Business Innovation and Employment (“MBIE”), large businesses will have to report on their payment practices every six months. The Select Committee is currently deciding on one of three disclosure period options, with the preferred option being to assign disclosure periods to large businesses based on their industry classification, making it easier for small businesses to compare competitors. This has faced criticism though, as it could make it harder to compare businesses with different classifications and could lead to businesses which provide similar goods and services being classified under different codes due to the self-selection process.

What Information Will Need to be Disclosed?

Businesses will likely have to disclose:

• average number of days they take to pay invoices from suppliers;
• percentage of invoices that were paid on time;
• percentage of invoices paid in full during the reporting period;
• proportion of total invoices paid within specified timeframes (e.g., 9 per cent between 31 and 60 days);
• proportion of total value of invoices within specified timeframes (e.g., 13 per cent between 31 and 60 days); and
• other payment practices that the business uses.

The purpose of these reporting measures is to show distribution, frequency and proportionality in a way that is simple for large businesses to calculate and small businesses to interpret.

What are the next steps?

Once the Bill has passed, the Companies Office will establish a business payment practice register to record the payment information and notify businesses when disclose is due. Businesses will receive guidance on how to complete the calculations for their reports, submit their information, and apply for an exemption. Exemptions will only be granted in exceptional circumstances such as where it would be impractical, inefficient, or unduly expensive.

The Bill is currently at Select Committee stage, with the report due in April 2023. The government is yet to announce when the Bill will come into effect. In the meantime, large businesses may wish to review their payment practices with small businesses and consider whether they want to amend them before they are required to publicly disclose them.  

Our thanks to summer intern Andrew Walker for his contribution towards this article.