Falling dairy prices expected to hit future cash flow
Commercial cash flow appears to be in rude health, with analysis of invoice payments revealing that businesses are paying each other with record speed, although continued falls in dairy prices are expected to affect future performance.
Dun & Bradstreet’s Trade Payments Analysis shows that the average time taken by businesses to pay their invoices dropped to 37 days during Q1 2015, the fastest rate on record, down from 39 days in the previous quarter and 41.5 days last year.
The improvement follows a jump in the proportion of accounts settled on-time (within 30 days), which reached 79 per cent in the three months to March, up from 71 per cent a year earlier.
According to Dennis Martin, Managing Director of Dun & Bradstreet in New Zealand, the latest findings reveal the cash flow benefit from the economy’s performance through 2014, although there are concerns about a slowdown in growth and the affect of falling dairy prices.
“With the Kiwi economy expanding at more than three per cent through last year and consumer spending hitting an all-time high, businesses have been benefitting from a cash injection,” said Mr Martin.
“As the numbers show, this has helped owners to stay on top of their cash flow, settle more of their bills on time, and in turn move money back through the economy more quickly.
“There are signs, however, that this stellar performance is easing, with data out this month showing first quarter GDP growth of just 0.2 per cent, and a seventh consecutive fall in dairy prices.
“Based on this, we expect to see a tightening of cash flow in the agriculture sector, which will in turn have a knock-on effect to payment times through the rest of the economy,” Mr Martin added.
Despite these future expectations, Dun & Bradstreet’s Trade Payments Analysis shows that the agriculture industry paid its invoices in an average of 35 days during the first quarter of the year, two days ahead of the national average and down from 39 days in Q1 2014.
The biggest improvement was recorded by the transportation sector, with its payment times dropping by 11 days compared to last year, to an average of 39.9 days in Q1 2015. The utilities sector also recorded a significant fall in payment times, moving from 48 days to 38 days over 12 months, with both industries benefitting from the sharp drop in oil and fuel prices at the end of last year. The forestry sector, however, was the fastest paying in Q1 2015.
The communications sector was the slowest to pay its invoices, averaging 41.8 days in the first quarter of the year. Despite its significant year-on-year improvement, the transportation industry remained the second slowest to make payments.
Across sectors, the country’s small businesses have been the fastest to settle their accounts. Businesses with between 6–19 employees averaged 36.3 days to pay their bills, down from 40.3 days at the same time last year. Meanwhile, those with fewer than five employees averaged 37.9 days in Q1 2015, down from 40.8 days in 2014.
Big business is the slowest to pay commercial invoices. At an average of 42.5 days, companies employing more than 500 people took five days longer than the national average to pay their accounts during the first quarter of the year, while those with between 200–499 staff were the next slowest, at an average of 40.6 days.
Across the South Island, businesses paid their invoices in an average of 35.6 days, with those in Christchurch averaging 36 days. Businesses based on the North Island were marginally slower, at 37.5 days, while both Wellington and Auckland averaged higher payment times of 38.4 and 39 days respectively.
“The general strength in the New Zealand economy over the past year has fed into a further sharp fall in trade payment times,” said Stephen Koukoulas, Economic Adviser to Dun & Bradstreet.
“Firms are clearly using this positive cash flow to pay their bills more quickly than ever before.
“While the rate of economic growth appears to be slowing, business cash flow will receive some support from an easing of interest rates,” Mr Koukoulas added.
About Trade Payments Analysis
Business-to-business payment information is a highly predictive data set and a critical element in credit risk scores and business failures forecasting.
The distinct advantage of trade information over other forms of company data is its ability to provide insight into current performance. Company financials, which are considered to be critical to effective decision making, are reported relatively infrequently and as a consequence, organisations may be required to make decisions using data that is up to 12-months old. Conversely, because trade information is reported monthly, it reveals how an organisation is paying its existing obligation.
Trade data is also effective across all business sizes, being the most predictive element in SME scores and the second most predictive (behind financials) in other credit scores. The predictive nature of trade data combined with its timely availability enables businesses to properly assess credit risk.
This includes the identification of both high and low risk customers, thereby enabling firms to minimise the risk of late payments and bad debts and identify the good credit accounts that will create long-term, profitable credit relationships.