In May we shared how small businesses experience a great degree of variability when it comes to their cash flow - fast-forward a few months and the latest data paints a similar picture. But who’s feeling the bumps and which industries have had a smoother journey over the last year?  

The Xero Small Business Insights dashboard, launched earlier this year, provides insights into the New Zealand small business sector. Its metrics are based on anonymised, aggregated data from the hundreds of thousands of small businesses that process their invoices through Xero. In the case of cash flow, it looks at the percentage of businesses that are cash flow positive or negative, and how that number varied from month-to-month in the last year.

Taking June as a mid-year snapshot - just under half (49.4%) of the Kiwi small businesses using Xero experienced positive cash flow during this month.

Looking back over the last 13 months of our data (June 2017 to June 2018) tells a story of numerous ups and downs for small businesses, with lows in January of just 38 percent of small businesses experiencing positive cash flow and 41 percent in August 2017. Then there were far stronger months like November 2017, December 2017 and March 2018 where positive cash flow levels were enjoyed by well over half of small businesses (hovering around 55-56%). The average for the year ended June 2018 was 50.64% of small businesses being cash flow positive.

The dip in the months of May (42.8%) and June (49.4%) this year, compared to healthier months of March (56.5%) and April (53%), could be due to businesses working to the June financial year-end period and focussing on getting their accounts in order, while momentarily overlooking accounts payable and receivable.

Looking at the industry data we can see how small businesses in the education and training sector experience significant ebbs and flows when it comes to cash flow. For example, in June 2017 only 29 percent of these small businesses were cash flow positive but the following month of July nearly three quarters of the industry had positive cash flow (73%), with a drop back down to 28 percent in August. These types of fluctuations are felt far less by the likes of the Financial and Insurance Services industry, with a range from 41.8% being cash flow positive in August 2017 - their weakest month - to 53.8% in October, which was their strongest month.

While some industries may experience greater fluctuations than others, we know that cash flow is critical to small business’s financial wellbeing and survival so it’s encouraging to see the Government throwing its support behind initiatives like e-invoicing. And while it’s too soon to see the effect of the Accounting Income Method (AIM)  introduced in April, it’s hoped the changes will have a positive impact on cash flow with small businesses being able to pay provisional tax more accurately in line with their income earnt.

This also has important implications for small business financing, especially for those who are cash flow negative and need to fill a short term gap. More and more we are now seeing alternative lenders that - with customer permission - are using data from the Xero API to make lending decisions. Companies such as Spotcap, Fuelled and Fundtap in NZ, Iwoka and Market Invoice in the UK or Waddle in Australia.

This is echoed by Curtis Bailey, CEO at Tradify, who says “for small business cash flow is really important as often there is a minimal amount of capital available to the business to fall back on when times get tough. Cash flow issues can lead to the inability to pay staff, provide services, order materials, commit to work, invest in R&D etc. Positive cash flow isn’t a goal for everyone though. Startups in growth mode deliberately run at a loss. These types of businesses recycle all revenue back into the business to fuel growth and fund the shortfall with external capital.”

While the very nature of small business makes them more susceptible to market changes, the degree to which these companies experience ups and downs of cash flowing in and out of their accounts, and their ability to weather those highs and lows, is a strong indicator of how our economy is performing across the board.

This article was prepared by Xero using Xero Small Business Insights data, for the purpose of informing and developing policies to promote small business in New Zealand. It contains general information only and should not be taken as taxation, financial, investment or legal advice. Xero recommends that readers always obtain specific and detailed professional advice about any business decisions.

Download the Xero Small Business Insights summary here

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