Why Australian small businesses are struggling with cash flow
When it comes to health checks for business, one of the indicators to look at is cash flow. However, in the last year small businesses with positive cash flows have, on average, only accounted for 52 to 53 per cent of Australian businesses, according to Xero's Small Business Insights.
In 2016, small businesses made up nine out of 10 companies, as reported by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). making them a solid part of the Australian economy. So what's causing over 40 per cent of these to struggle with their cash flow?
The reasons why Australian small business are struggling with cash flow
While cash flow issues stem from a variety of causes, three main areas generally appear across the board. Understanding these problems, and learning how to combat them, can help small businesses stay on top of a healthy cash flow.
1. Late payments
In August 2018, roughly 34 days passed on average while Australian small businesses waited for invoice payments, according to Xero.
Large companies may barely notice this period of time, however, it has a much larger effect on their smaller counterparts. In fact, it's often the bigger businesses that are causing the late payment issues for SMBs, according to Alistair Lamond, the commercial director of Skippr. This is backed up by a statement by Kate Cornell, from ASBFEO. In it, she revealed that some industry giants had been making suppliers wait as long as 60 days for payment, or asking for a discount for paying by the due date.
However, since the end of the 2017 year, late payments have drawn a lot of attention. Already, results are being seen due to a campaign run by Kate Cornell, and it's caused many large companies to pledge to pay invoices faster.
2. Poor financial management
From overspending, to not having a budget, small businesses suffer when their finances aren't managed properly. Making purchases without being aware of finances hurts cash flow, and is felt quickly.
Many small businesses don't spend enough time keeping track of their spending. Sometimes, this is because they're not using the right software, making it difficult to analyse what's happening, and to create a budget.
As a small business owner, it's easy to take control of this and improve the company's cash flow. Whether the small business analyses the incomings and outgoings themselves, or brings in the right accountants to help it's possible to turn the financial management around. Dedicating a little bit of time regularly will help small businesses to stay on top of the company's money.
3. Being out of touch with your small business
Each small business will have its own personal quirks and oddities to it, and being unaware of it can impact a company's cash flow.
For example, if a business goes through a seasonal cycle, this should change how stock is purchased, and what marketing is invested in, going into a slow period. Holding stock for a long period hurts cash flow, as the output money won't get a quick return, tying up funds.
If small business owners don't know their company, they may not realise if they're running their company on a negative cash flow business model either. Knowing this either could allow them to change their model or, if that's not possible, manage it more efficiently.
Regular reports, forecasts, and cash flow statements help small businesses to get a feel for the ins and outs of their company and supports them in making better decisions.
If you'd like to know more about cash flow, and how to improve yours, reach out to us at Wilson Porter. With years of experience helping small businesses behind us, we can help you get the results you want.