Which of the following is the most appropriate turnaround time for payment of an account?

Payment Times Reporting Scheme

The Payment Times Reporting Scheme commences on 1 January 2021. The scheme requires large businesses and large government enterprises to report twice a year on their small business payment terms and times. Read our FAQs to find out more about the scheme.

Dealing with an unpaid invoice

It is important to make sure you have invoiced correctly to ensure prompt payment.

Check your invoice

Before you send an invoice, you should double-check you have included everything, and that the details match the order and delivery receipt.

Your customer might not tell you there is something wrong with your invoice, and you will only find out when you do not receive a payment. It’s worth finding a contact in the accounts area that can let you know what information they need to process your invoice. This contact can also let you know when your invoice has been received and accepted.

What to include

Our Payment Times and Practices Inquiry found that it is important for small businesses to understand what their customers need to make a payment. Not only must the details be correct, it must also be sent to the correct section within your customer's business. Using electronic invoices can reduce errors, resulting in prompt payment.

According to the Australian Taxation Office, tax invoices must include at least seven pieces of information to clearly determine:

1. that the document is intended to be a tax invoice
2. the seller's identity
3. the seller's Australian business number (ABN)
4. the date the invoice was issued
5. a brief description of the items sold, including the quantity (if applicable) and the price
6. the GST amount (if any) payable
7. the GST amount for each item, or clearly state that the total price includes GST.

There may be additional requirements for invoices depending on the type of sale. Find out more about issuing tax invoices.

Chase an invoice

Once you have checked your invoice was accurate and received, you can chase payment.

It can be useful to set up a timeline for monitoring payments. Here is an example of steps you can take to chase a payment:

Step 1: Before your send an invoice

Get in contact in the accounts area and find out what they need to process your invoice.

Step 2: 1-2 days after you send the invoice

If it is a new business or slow payer, confirm they received the invoice. Check the details are accurate and complete.

It might be worth checking 10 days before payment is due that your invoice is processed and due to be paid. Ask if it is 'in the system' or 'in the next pay run'.

Step 3: When payment is 1-2 days overdue

Check if there is a problem that has prevented payment. Find out what you can do to resolve it. Regularly remind them it is overdue and decide whether to take further action.

Step 4: Invoice overdue

Warn them about the next steps you will take if the invoice isn't paid.

Find out more about chasing unpaid invoices.

Take further action

If chasing payment hasn’t worked, it is time to consider your next step.

If you are ready to take further action, but you are unsure who to turn to for help, try our Dispute Support tool.

Dispute Support is an online referral tool to help businesses find the most appropriate low cost dispute resolution services to help resolve business disputes.

Follow these steps to find an appropriate service:

• Step 1: Choose ‘Recovering unpaid invoices’
• Step 2: Choose your state or territory
• Step 3: Is your business in the building and construction sector? Y/N

Still need help?

If you still need help, the Australian Small Business and Family Enterprise Ombudsman Information Line may be able to help you identify the most appropriate service to resolve your dispute.

You can contact the Information Line on 1300 650 460. Alternatively you can lodge a dispute and a case management officer will be in contact with you shortly.

Electronic invoicing

Electronic invoicing or e-invoicing is the exchange of invoices between a seller and customer in an electronic format.

Electronic invoicing can make the payment process easier. There are software packages available which electronically record core customer details, generate and send invoices and send automatic reminder notices when payment is due.

In some cases, suppliers can issue invoices using their customer’s e-invoicing software, but they may need to pay a fee. It’s worth considering any cost against the benefit of being paid on time.

Find about more about e-invoicing.

Average payment period (APP) is a solvency ratio that measures the average number of days it takes a business to pay its vendors for purchases made on credit.

Average payment period is the average amount of time it takes a company to pay off credit accounts payable. Many times, when a business makes a purchase at wholesale or for basic materials, credit arrangements are used for payment. These are simple payment arrangements that give the buyer a certain number of days to pay for the purchase.

Definition: What is an Average Payment Period?

Oftentimes, discounts for paying in a shorter period of time are given. For example, a 10 / 30 credit term gives a 10% discount if the balance is paid within 30 days, whereas the standard credit term is 0 / 90, offering no discount but allowing payment in 90 days.

The average payment period calculation can reveal insight about a company’s cash flow and creditworthiness, exposing potential concerns. For example, is the company meeting current obligations or just skimming by? Or, is the company using its cash flows effectively, taking advantage of any credit discounts? Therefore, investors, analysts, creditors and the business management team should all find this information useful.

To calculate, first locate the accounts payable information on the balance sheet, located under current liabilities section. The average payment period is usually calculated using a year’s worth of information, but it may also be useful evaluating on a quarterly basis or over another period of time. So, the desired period of time may dictate which financial statements are necessary.

Here is how to calculate the average payment period equation.

The average payment period formula is calculated by dividing the period’s average accounts payable by the derivation of the credit purchases and days in the period.

Average Payment Period = Average Accounts Payable / (Total Credit Purchases / Days)

To calculate, first determine the average accounts payable by dividing the sum of beginning and ending accounts payable balances by two, as in this equation:

Average Accounts Payable = (Beginning + Ending AP Balance) / 2

Now, use the answer to solve for average payment period:

Average Payment Period = (Beginning + Ending AP Balance) / 2 / (Total Credit Purchases / Days)

Example

Clothing, Inc. is a clothing manufacturer that regularly purchases materials on credit from wholesale textile makers. The company has great sales forecasts, so the management team is trying to formulate a lean plan to retain the most profit from sales. One decision they need to make is to determine if it’s better for the company to extend purchases over the longest available credit terms or to pay as soon as possible at a lower rate. The average payment period can help the management team see how efficient the company has been over the past year with such credit decisions.

First, the team needs to compute the average accounts payable. Last year’s beginning accounts payable balance was $200,000 and the ending balance was $205,000. The total for credit purchases over the year was $875,000. The formula to figure this is ($200,000 + $205,000) / 2, so the average accounts payable is $202,500.

Next, this is plugged into the average payment period equation as so: $202,500 / ($875,000 / 365) = 84.48.

So, the average payment period the company has been operating on is 84 days.

The management team will use this information to determine if paying off credit balances faster and receiving discounts might produce better results for the company.

Analysis and Interpretation

Average payment period in the above scenario seems to illustrate a rather long payment period. The company may be giving up crucial savings by taking so long to pay. Assume that Clothing, Inc. can receive a 10% discount for paying within 60 days from one of its main suppliers. The company management team would need to evaluate this to see if there is adequate cash flow to cover the purchase in 60 days. If it can, that could make for a nice increase to the bottom line, as 10% is a huge difference in the clothing industry.

On the other hand, Clothing, Inc. might be better off keeping its money for the entire payment period and forgoing the early pay discount because it can invest its money in higher margin, higher turnover inventory in the meantime. Thus, it would make more than 10% on its money reinvesting in new inventory sooner.

All of these decisions are relative to the industry and company’s needs, but it is apparent that the average payment period is a key measurement in evaluating the company’s cash flow management. Thus, it should always be other companies’ metrics in the industry.

Practical Usage Explanation: Cautions and Limitations

Obviously, if the company does not have adequate cash flows to cover payments at a faster rate, the current average payment period may show the current credit terms are most appropriate. If the industry has an average payment period of 90 days also, for Clothing, Inc., sticking with this plan makes sense.

To analysts and investors, making timely payments is important but not necessarily at the fastest rate possible. If a company’s average period is much less than competitors, it could signal opportunities for reinvestment of capital are being lost. Or, if the company extended payments over a longer period of time, it may be possible to generate higher cash flows.

In short, payment period is a sensor for how efficiently a company utilizes credit options available to cover short-term needs. As long as it is in line with the average payment period for similar companies, this measurement should not be expected to change much over time. Any changes to this number should be evaluated further to see what effects it has on cash flows.

Contents

• 1 Definition: What is an Average Payment Period?
• 2 Formula
• 3 Example
• 4 Analysis and Interpretation
• 5 Practical Usage Explanation: Cautions and Limitations

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