Accounts Payable and Receivable Practices Under the Spotlight: Tax Alert – December 2022

The significance of cash flow in supporting successful business operations cannot be overstated. Late payment of invoices has long been a concern for business owners, impacting cash flow and hindering growth. To address this issue, the government is introducing proposed reporting laws to encourage timely payments. The Business Payment Practices Bill is currently under consideration, with the aim of fostering transparency and incentivizing improved payment practices among large businesses.

Understanding the Proposed Changes:

1. Who is Affected: The reporting rules will apply to businesses with an annual turnover exceeding $33 million. Both group-level and individual company-level disclosures will be required for independently large companies within a group.

2. Required Information: Businesses will need to disclose their payment terms on a public website and report their payment practices twice a year. The potential data to be reported includes various measures, such as the average number of days to pay invoices, percentage of invoices paid within the agreed period, and more.

3. Public Disclosure: The Ministry of Business, Innovation and Employment (MBIE) will establish a Business Payments Practices Register accessible to the public. This register will contain the disclosed data, providing better information for decision-making when engaging new customers.

4. Penalties for Non-Compliance: Businesses that omit material information or provide false or misleading data may face fines up to $500,000.

Implementation and Compliance:

1. Effective Date: The legislation has not yet been enacted but is currently open for submissions until late April. If enacted, the rules will take effect the day after receiving Royal Assent.

2. Reporting Considerations: While the precise reporting requirements are not specified in the Bill, a separate discussion document outlines potential measures. Businesses should review their accounts payable and receivable systems and processes, assess data collection methods, and consider necessary system changes to ensure accurate reporting.

3. Short-Term Actions: To prepare for compliance, businesses can start by:

• Reviewing current payment systems, policies, and processes against the proposed requirements.
• Clarifying when the clock starts for invoice receipt and defining “paid invoices” to align with the regulations.
• Distinguishing between customer invoices and intercompany invoices.
• Ensuring clear recording of payment due dates.
• Identifying any inconsistencies with proposed reporting measures and making necessary system adjustments.

Optimising Cash Flow:

Beyond complying with the reporting laws, businesses can take additional steps to optimise cash flow:

1. Prepare a Cash Flow: Develop a realistic cash flow projection and monitor it regularly to anticipate challenges and manage stakeholders effectively.

2. Accounts Receivable: Establish payment terms that align with your business and clearly communicate them to customers. Consider offering incentives for early payment or penalties for late payments. Send invoices promptly and proactively follow up on outstanding payments.

3. Accounts Payable: Negotiate payment terms with suppliers that suit your business. Unless early payment discounts are available, adhere to agreed payment terms.

4. Inventory Management: Regularly review inventory levels and orders to avoid excessive stock that may become obsolete.

5. Capital Expenditure: Evaluate the viability of leasing versus purchasing to minimize upfront costs and potentially reduce maintenance expenses.

6. Invoice Factoring: Explore invoice factoring as an option to improve cash flow by selling invoices at a discount. This provides immediate working capital while sacrificing a portion of the profit margin.

The proposed reporting laws for accounts payable and receivable practices aim to enhance payment transparency and improve cash flow for businesses. By understanding the requirements, complying with the regulations, and implementing strategies to optimize cash flow, businesses can ensure their financial stability and growth in an increasingly competitive market.

Your Outside Team