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Cash flow gap plagues 90% of SMEs

Business

An average small businesses spends four months a year with more outgoings than receipts, finds report.

By Philip King 10 minute read

Nine out of 10 small buisinesses struggle with negative cash flow at least once a year and one in five are plagued for six months with expenses greater than revenue, according to the latest Xero survey.

It finds chronic cash flow stress is endemic among Australian SMEs with an average small business experiencing 4.2 months with more outgoings than receipts in 2021.

The report, Crunch: Cash flow challenges facing small businesses, analysed inflow and outflow data from more than 200,000 businesses across Australia, New Zealand, and the UK.

Chief customer officer at Xero, Rachael Powell, said the cumulative effect of unceasing stress put a ceiling on the potential of the sector.

“Months of negative cash flow can leave small business owners struggling to pay essential costs like wages and rent,” she said. “This, in turn, compromises the ability of small businesses to stay afloat, hire, and grow.”

The report found that in Australia:

  • 92 per cent of small businesses experienced at least one month of negative cash flow in 2021 and for 20 per cent it lasted more than six months.
  • An average small business went through 4.2 months of negative cash flow in 2021, a modest improvement compared with two years earlier when the figure was 4.4 months.

Xero managing director for Australia and Asia, Joseph Lyons, said huge challenges for small business remained post-pandemic.

“The fact that cash flow improved during the pandemic, despite spikes in cash flow crunches at the start of 2020, shouldn’t be a cause for celebration,” he said.

“While government schemes like JobKeeper and JobSaver helped buoy cash flow back relative to pre-pandemic levels, the apparent improvements were also the result of businesses drastically slashing expenses — often because they were forced to reduce trading hours and typically at the expense of investment, employee retention, and any cash buffers the business might have once held.

“Cash flow doesn’t give a full picture of small business health, but it does offer a strong indicator of how much pressure small businesses are facing, and we’ve seen little to no lasting improvement for Australian small businesses even post-pandemic.”

Ms Powell said the report revealed that cash flow was a persistent and systemic challenge, but support with budget planning could unlock opportunities.

Ensuring customers paid promptly was one key step towards solving the problem while strategies adopted during the pandemic, such as increased food delivery and e-commerce sales, could help improve cash inflows long term.

Working with accountants and bookkeepers to predict crunch periods and build up cash buffers was another strategy.

“Small business owners don’t have to sit back and accept regular cash flow trouble,” she said.

“By working closely with their accountants and bookkeepers, they can beat the crunch by analysing their finances, anticipating periods when cash flow often dips into the red, and adjusting how they operate.”

The report, Crunch: Cash flow challenges facing small businesses, was prepared by professional service company Accenture with the support of Xero.

 

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Philip King

Philip King

AUTHOR

Philip King is editor of Accountants Daily and SMSF Adviser, the leading sources of news, insight, and educational content for professionals in the accounting and SMSF sectors.

Philip joined the titles in March 2022 and brings extensive experience from a variety of roles at The Australian national broadsheet daily, most recently as motoring editor. His background also takes in spells on diverse consumer and trade magazines.

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