Cash flow crunch: The red flags impacting small business cash flow

It’s so fantastic to bring Xerocon back to Sydney. Having the opportunity to meet and connect with partners from Australia, New Zealand and Asia has been really great – and we’re only just getting started! I’m looking forward to two full days of keynotes, breakouts and partner sessions – and, of course, the Xerocon wrap party at Luna Park! 

Today, I am thrilled to launch part two of our Xero Small Business Insights special report Crunch: Cash flow challenges facing small businesses. We launched part one, which examined and offered insights into how small businesses can improve their cash flow management, at Xerocon London in July.

This follow-up report analyses data from more than 200,000 small businesses in Australia, New Zealand and the United Kingdom. It identifies three early warning indicators that small businesses and their advisors need to be on the lookout for to ensure they stay on top of cash flow management. 

These red flags are:

• Late payments
• Rising expenses 
• Seasonal slowdowns

Understanding these challenges in more detail is an important first step in identifying ways small businesses can manage their cash flow more effectively.

Late payments are linked to greater cash flow crunches

Perhaps the most concerning insight from the report is that almost half of all payments made to small businesses are late. This practice costs small businesses AU$1.1 billion per year in Australia, NZ$456 million in New Zealand and £684 million in the United Kingdom.

These late payments create a flow-on effect for small businesses, threatening owners’ ability to meet their obligations – such as rent or wages – in time. Even a small reduction in this late payments trend could have a big impact on small businesses. For example, taking the group of businesses that are currently paid late for 60 to 80 percent of their invoices, if this rate of late payments was reduced so that they were only paid late less than 20 percent of the time, the average number of months those businesses would suffer from negative cash flow would reduce by 17 percent in Australia, 19 percent in New Zealand, and 6 percent in the United Kingdom.

Rising expenses increase cash flow stress

As small businesses grapple with the challenges of operating in a post-pandemic environment, a range of external factors are also taking their toll on small business cash flow.

Inflation is impacting economies the world over – Australia, New Zealand and the United Kingdom are all experiencing their highest rates of inflation in more than 30 years. Supply chain disruptions, coupled with heightened commodity prices such as oil, have contributed to rising costs for small businesses. And payroll costs are also increasing, as labour markets tighten globally.

For many small business owners and their employees this will be the first time they’ve experienced managing or working in a business during a time of inflationary pressures. And, the effects are already being felt. Expenses were 14 percent higher in 2021 than in 2020 in Australia and New Zealand, and 18 percent higher in the United Kingdom. And as this inflationary trend continues towards the end of 2022, pressure on small businesses is only going to mount.

Seasonal slowdowns create cash flow uncertainty

The third key insight our data reveals is the effect of seasonal slowdowns on small business cash flow. All small businesses struggle with cash flow more in January and February, compared to other months, regardless of the season.

In Australia and New Zealand, small businesses receive 7 percent of their annual revenues in each of January and February – almost 20 percent less than the other 10 months of the year. The gap is smaller in the United Kingdom, where small businesses receive around 13 percent less during that period than the other 10 months of the year.

Unsurprisingly, these revenue slowdowns at certain times of the year translate to high rates of cash flow stress.

How can small businesses better manage cash flow?

The good news is that there are a few steps small businesses and their accountants and bookkeepers can take to minimise cash flow risks. 

Use digital solutions to stay on top of expenses and revenue: Implement technology-based solutions such as online invoice payments and eInvoicing. The Xero App Store offers a range of apps that can help small businesses monitor their expenses and get paid more quickly.

Get paid faster: Xero can help small businesses get paid faster in a number of ways, including providing online payment options for customers on your invoices, and setting up reminders that are automatically sent to customers when their invoices are overdue.

Review your expenses: With inflation hitting record levels, now is the time to review your expenses and see where you can reduce your costs. Look for alternative suppliers that may be able to offer better prices; negotiate with your existing suppliers and ask for discounts for bulk purchases or early payments. You can also review your subscriptions and cancel any that you no longer need as well as review all variable costs such as advertising and marketing to make sure you’re getting an appropriate return on this investment.

Put together a budget: Work with your accountant or bookkeeper to put together a budget that allows you to predict cash flow and anticipate crunches so you can better plan for the difficult months.

Consider funding to support cash flow shortfalls: Accessing the right working capital could help you to take control of cash flow, get on top of business expenses and give you the confidence to take on opportunities when they arise. Waddle, from Xero, offers an easy way for small businesses to access capital tied up in invoices.