Small businesses face bookkeeping challenges, overdue invoices during pandemic

Small business owners have been coping with unpaid invoices and inadequate accounting during the pandemic and needed to cover expenses by selling family heirlooms and other valuables.

A survey released Tuesday by Wave, an H&R Block company, found that 17% of the 1,008 microbusiness owners with nine employees or less it polled said there are invoices they’ve sent out that have never been paid. Nearly one out of 10 (8%) said they have waited more than a year for invoices to be paid, while 70% have waited between one to six months. Nearly one in 10 (8%) of the small business owners polled said they have sold off a family heirloom to cover expenses due to late customer payments, while 11% have need to take another job. In addition, 30% of the respondents indicated they have needed to borrow from their own money, and nearly one out of five (19%) have needed to borrow from family or friends. The same percentage of respondents have had to forgo or reduce their own paycheck, while 13% have been forced to take out a loan.

The pandemic has forced millions of small businesses to close their doors over the past year and a half. The ones who have managed to survive have needed to take extraordinary steps to keep their doors open.

Closed stores on Grant Avenue in San Francisco

David Paul Morris/Bloomberg

“Cash flow emerged as a really key pain point for small business owners, particularly as a result of late customer payments,” said David Axler, vice president of books, banking and tax at Wave. “We found that about 70% of all respondents waited between one to six months to get paid as a result of overdue invoices. These are invoices that are paid beyond the standard terms set by an invoice, whether it’s 15 days or 30 days. The majority of the small business owners we heard from are waiting one to six months to get paid. It results in challenges for that business, and 25% said that they’ve waited over a year or have yet to be paid for services rendered.”

When it comes to excuses for late payment, small business owners indicated they have heard a variety of reasons, ranging from “I didn’t have the money” (34%) to “I just forgot” (33%), “I never got the invoice” (24%), and “I was on vacation” (13%).

“Securing cash flow as a result of late or lack of payment was a major issue,” said Axler. “We also went a little deeper there and asked, ‘Why is it that they’re not paying? What are you hearing from your customers as to why that is?’ The most common is ‘we didn’t realize’ or ‘we just forgot’ or ‘I never got one.’ So this concept of the invoice not actually being there, that was about 25% of those who experienced a late payment. The excuse was the customers having not received the information or forgotten about it altogether, so this lack of follow-up or awareness to the fact that there’s a payment to even be made. And we heard especially so from service-based businesses. It’s less common in retail where the purchase has to be made at the point at which the service is rendered or if it’s a product. But when you’re providing a service, whether you’re a consultant or a creative photographer, maybe a personal trainer of some kind, the possibility of a late payment is high because often the invoice is sent after the service is rendered, so it creates a high possibility for that to happen.”

The survey found that most of the survey respondents rely on traditional forms of payment such as paper checks (71%) and cash (61%), while half accept debit or credit cards (50%). Nearly two out of five (38%) said they use their personal checking account for business expenses, while 29% indicated they don’t separate their personal and business finances at all. More than one out of five (22%) of the respondents said they use pen and paper to track their finances, while 14% said they use an Excel spreadsheet. Some 14% of the respondents admit they don’t follow up with customers on outstanding invoices, while 13% admitted they forget to send or are delayed in sending out invoices in the first place. More than one in five (21%) said they don’t log or track their receipts, while over one in 10 (11%) rely on high-interest financing to fund their business.

Cash flow remains a big challenge for small businesses during the pandemic. Nearly half (45%) of the small business owners surveyed cite cash flow as a challenge. The microbusiness owners surveyed pointed to other barriers to cash flow, including high bank account fees (53%) and slow access to funds paid into their bank account (31%) as the main reasons why they would consider switching from their current banking provider.

Looking ahead, the microbusiness owners surveyed felt more confident and motivated as a result of vaccine rollouts and the continuing economic recovery. Nearly two out of five (39%) said they feel even more motivated to continue working for themselves, and 35% said they are confident about the financial future of their small business.

Many digital business practices that started during the pandemic are expected to continue. Over one in five (21%) of the small business owners surveyed began accepting digital payment systems like Venmo and PayPal during the pandemic and plan to continue doing so, while 15% began or plan to continue digital banking and checking. Nearly one in 10 (8%) began or plan to continue using digital invoices or bookkeeping, while 14% began or plan to continue doing virtual consultations, quotes or pitches, and 13% began or plan to continue offering virtual services or online sales.

“A positive trend that we heard and we observed was the comfort with digital payments,” said Axler. “The acceptance of digital payments and the ease with which payment can be made has gone up. So even though the most common response we heard was they’re still relying on paper checks at 70% and cash at 61%, now just over half are comfortable in accepting debit and credit cards digitally. Businesses that accept digital payments like debit and credit are actually more likely to get paid and are getting paid faster than those who are relying on traditional methods. In the pandemic, that was more pronounced because the physical check required some sort of some semblance of physical proximity. I needed to hand you something, or I needed to be there to pick it up, but now that I can rely on it digitally, I can take what was so dangerous in some instances, and it’s now a safe, reliable, trackable method of getting paid.”

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