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Accounts payable and receivable practices under the spotlight

Tax Alert - December 2022

There is a well-known saying by Alan Miltz that “revenue is vanity, profit is sanity and cash is king”, and we couldn’t agree more. The most successful business ideas won’t work if there isn’t the cash flow to support them.

A 2019 report by the Small Business Council highlighted that a key concern of business owners is the late payment of invoices. Picking up on that concern, the Government has taken the next step of introducing proposed reporting laws for large businesses, to essentially shame businesses into paying invoices on time. The Business Payment Practices Bill (the Bill) is currently being considered by the Economic Development, Science and Innovation Committee, with submissions closing on 8 January 2023.

The Minister for Small Business explained the Bill's purpose during the first reading:

“Poor payment practices persist and continue to affect many small New Zealand businesses. Small-business owners in New Zealand continue to report that delays receiving payment are hurting cash flow, increasing stress levels, and inhibiting their business growth. It is abundantly clear that this situation warrants intervention. … Small businesses face challenges enforcing their payment terms, because they have limited bargaining power and limited resources. We know that larger firms can exploit the power imbalance by setting payment terms that advantage themselves at the expense of their smaller suppliers. When this happens, small suppliers often feel unable to ask for more reasonable terms, for fear of damaging relationships. … The purpose of the Business Payment Practices Bill is to establish a disclosure regime that brings transparency to business-to-business payment terms and practices in New Zealand. This will lead to businesses having better information to inform their decision making when engaging new customers. It will also incentivise larger businesses who are increasingly conscious of their reputation to improve their business payment practices. A secondary benefit of the regime is that it will build an evidence base on business-to-business payment practices and enable the Government to assess, over time, whether any further regulatory intervention is needed.”

All political parties, with the exception of ACT, supported the Bill through its first reading; albeit one opposition member noted that while they support small businesses being paid promptly and timely, the current proposal is likened to getting out a sledgehammer to whack a walnut.


The proposal takes form in two parts. There is the Bill that sets the framework, and also draft regulations that are subject to a separate consultation process.

Who is subject to the rules

Businesses with more than $33 million annual turnover. A group of companies will need to disclose information at a group level and also for individual companies within the group that are independently large.

What is required

Disclosure (on a website) of payment terms and twice-yearly reporting of payment practices in relation to invoices received or paid, as well as invoices issued. The potential data to report is discussed below.

How will information be publicised

The Ministry of Business, Innovation and Employment (MBIE) will be establishing a Business Payments Practices Register. The register will be accessible by the public and will contain a variety of data (discussed below).

Penalties for non-compliance

If a business omits material information from disclosure or provides false or misleading information there is a $500,000 fine.

When will these rules take effect

Legislation has not yet been enacted, it will be with a select committee to consider submissions until late April. If the legislation is enacted it will take effect from the day after Royal Assent.

As noted above, the precise data which needs to be reported is not included in the Bill, instead, options are set out in a separate discussion document. The 11 potential reporting measures include:

  1. Average number of days to pay invoices from suppliers.
  2. Percentage of the number of invoices that were paid within the agreed payment period
  3. Percentage of invoices paid in full during the reporting period
  4. The percentage of invoices unpaid 61 days or more after receipt of invoice
  5. Average payment time
  6. The proportion of total number of invoices paid within 0-20; 21-30; 31-60; 61-90; 91-120, over 120 days
  7. The proportion of total value of invoices paid within 0-20; 21-30; 31-60; 61-90; 91-120, over 120 days
  8. Average number of days for receipt of payment
  9. Percentage of invoices received on time
  10. What are your standard payment terms offered to your suppliers in calendar days?
  11. What other payment practices does the entity employ?

Items 8 and 9 relate to accounts receivable and are designed to provide a broader picture of whether the large business has the cash flow to alter its payment practices.

Disclosure of the above information would need to be made on a six-monthly basis.

Consultation on the draft regulations closes on 26 February 2023.

How to comply

The discussion document notes that the Government “expect that compliance costs to produce the measures below should be modest, and that reports should be able to be automated.”

Given variable approaches to invoicing by businesses, the discussion document provides some technical notes, albeit doesn’t go so far as to explain how to deal with data inconsistencies such as differences between the date recorded on an invoice and the date it was actually received, when an invoice is considered to be received (for example if there are specific purchase order or invoicing procedures for suppliers to follow), or what to do in respect of reporting of contract disputes leading to withheld payments. The discussion document suggests:

  • “Paid invoices” are recorded only once payment has been made in full.
  • Invoices included are only those due during the disclosure period.
  • Invoices included are received by the reporting entity (not issued by the reporting entity), and exclude invoices from businesses in the same commonly owned group as the reporting entity.
  • Payment times are measured in calendar days, starting from the date of receipt of the invoice until the day the invoice has been paid in full.
  • The agreed payment period is usually set out in the contract, but there may be instances where it depends on details in the invoice or other documents.

Given the potential penalties at stake for non-compliance, large businesses will need to undertake a process to assess how this data can be collected, extracted and reported accurately.

In our experience before determining whether an entity complies with the proposed requirements it is worth reviewing your current payment systems and whether there is an opportunity to consolidate and optimise any divergent payments processes and systems.

To start with, this would involve mapping both your accounts receivable and accounts payable processes end-to-end and identifying the key risks, controls and gaps that would enable you to meet the new requirements (and in general to see whether working as designed).

Some of the proposals in the discussion document have many variables, for example determining when the clock starts, stops or can be paused; we would hope that in due course MBIE will issue some guidance notes on how to comply. Without this clarity measuring the number of days will vary from entity to entity.

Some of the proposed requirements such as “the proportion of total number of invoices paid within 0-20; 21-30; 31-60; 61-90; 91-120, over 120 days” don’t match with the common business practice of businesses monitoring creditor and debtor information is based on 0-30; 31-60; 61-90 days etc, and therefore systems changes may be required.

What to do in the short term:

1. Review your current accounts payable and accounts receivable systems, policies and processes against the requirements above and:

a) Understand when the clock starts. For example, when an invoice is received in an inbox (is that an or a named employee inbox). Are they checked daily, what happens if the person is on leave? What happens if an invoice is posted and remains uncollected or unopened?

b) Have a clear definition of “paid invoices”, what are the rules for underpayments of a few cents/dollars?

2. Do your systems distinguish between customer invoices and intercompany invoices? If not, how will you address this?

3. Does your system clearly record the date payments are due? If not, how will you address this?

Whilst the legislation and regulations are still in draft, this is a good time to review your accounts payable and accounts receivable systems and process. This is sometimes an area where Boards, Audit and Risk Committees and management do not pay much attention as they often rely on their external auditor to identify issues as part of the review of financial management controls. But as Alan Miltz said, “revenue is vanity, profit is sanity and cash is king,” and we would add that the two queens are your accounts payable and accounts receivable systems and processes.

Other issues to be aware of

While considering how to comply with these proposals, businesses should also be considering whether this represents an opportunity to look more closely at accounts payable and accounts receivable processes.

From 1 April 2023 changes will take effect for GST purposes, with a loosening of the prescriptive “tax invoice” requirements. Accounts payable teams need to understand the new requirements to ensure that payment is not withheld because an invoice doesn’t satisfy the “old” tax invoice requirements. You can read more about those changes here.

Optimising Cash flow

Taking control of cash flow is the first step toward optimising cash flow. Cash flow can be optimised in a number of ways, aside from just getting the money in the bank from customers.

Prepare a Cash flow

Prepare a realistic cash flow, and importantly, closely monitor it. Preparing a cash flow will allow you to foresee any potentially difficult periods and plan for these. As an example, work may be seasonal resulting in lower income or balloon payments may be due on loans at certain times. Regularly monitoring and updating your cash flow will allow you to manage external stakeholders, such as creditors, financiers and Inland Revenue. For example, accounts receivable may be declining, could this be due to an increase in disputed invoices? If so, this may be an area you need to address as to why, or maybe one customer is falling behind on payments which need to be addressed.

Accounts Receivable

Your payment terms should be commensurate with your business and payment terms with your suppliers. Whether payment terms are 7 days or the 20th of the month, this needs to be clearly stated and understood by both parties.

To encourage timely payment, consideration could be given to discount incentives for early repayment or penalties for late payments.

Send invoices promptly and have a system to monitor payments with timely follow-up. Don’t wait for outstanding invoices to accrue before following up. Ideally, pick up the phone!

Know your customers and their payment patterns. Any digression in a payment pattern may be an early indicator of difficulties on their behalf. Again pick up the phone!

Don’t be afraid to stop credit and move to cash-only terms. Bad business is not good business.

Accounts payable

Negotiate payment terms with suppliers that align with your business.

Unless early payment discount incentives are offered maintain your agreed payment terms.

Review Inventory

Regularly review inventory on hand, and forward stock orders, to ensure excessive amounts are not held which may subsequently become obsolete and worthless.

Review customer patterns to identify any change in demand.

Capital Expenditure

Consider the viability of leasing vs buying. Leasing may eliminate an initial capital outlay, (although requiring monthly expenditure), and in some cases, depending on the terms of the lease, remove the cost of repairs and maintenance.

Invoice Factoring

Invoice factoring is a means of improving cash flow by selling invoices to a factoring company at a discount. The factoring company will immediately make payment of a certain amount, (which may be around 80%) and once full payment is received from the customer by the factoring company the balance will be paid less all agreed fees.

The advantage is the access to immediate working capital, and the ability to focus on other areas of the business, with the disadvantage being a reduction in profit margin.

For further advice on the issues raised above, please contact one of our authors or your usual Deloitte advisor.

December 2022 – Tax Alerts

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