From a trickle to a flood: How cash flow changes over time

Perhaps no metric matters more to a small business than cash flow. It’s the lifeblood that sustains purchases, payroll and short-term operations. But if more cash is consistently going out of a business than coming in, its days can be numbered.

That’s why we chose cash flow as our key measure to follow in our Small Business Insights. We wanted to know: what percentage of Australian small businesses are cash-flow positive each month? What time of year is cash flow at its tightest? And when is it at its most abundant?

For answers, we looked to Xero data. First, we anonymized and aggregated data from among our 500,00 subscribers, so that no names or identifiable information was visible. We then traced the ebb and flow of their combined cash flow over three years.

We learned that in any given month, about half of Australian small businesses are cash flow positive. For these businesses, more money is entering the business than exiting. The rest are operating in the red.

The number varies with time. During the past year, we’ve seen as many as 55% of businesses operating with positive cash flow during December in the lead-up to Christmas. The figure has fallen as low as 48% in the months immediately following.

It’s perhaps understandable that cash flow swells in December. Many businesses post their biggest sales at Christmas and watch their coffers fill.

“You get so excited at all the cash in your bank account in December, and you think, “Maybe I can pay myself a salary this month,” says Pippa Oostergetel, founder of fashion label Squeak. “Then all of a sudden it’s like, ‘Oh, darn. I’ve got to pay my manufacturers $100,000’ It’s a bit heartbreaking.”

In January, cash flow tends to fall to its yearly low as businesses replenish their inventory. Just 48 percent of Xero small businesses were cash-flow positive in January 2017. Of course, many businesses, big and small, halt trading during the month. That means outstanding invoices can sit unpaid until February or March, further straining cash flow.

Sometimes the swings in cash flow are predictable. A look at 36 months of Xero data shows that cash flow tends to move in cycles, tightening near the end of each financial quarter. This may be partly because of BAS payments to the ATO, which are due every three months, says James Solomons, Xero Head of Accounting.

“Small businesses hold onto money because they have to pay their BAS,” says Solomons. “Once their BAS is paid, they may feel comfortable spending again.”

What is the second-tightest month for cash flow after January? It tends to be June, although this year is proving to be an exception. Just 49% of small businesses were cash-flow positive in June 2015 and June 2016. This June the figure was a healthier 51%.

Solomons sees two reasons why cash flow may tighten in June. The first has to do with money owed to small businesses. They typically wait longer than usual to be paid in the month of June, separate data shows. 

“For large businesses, especially publicly traded ones, it looks good to end the June financial year with a healthy amount of cash,” says Solomons. “Some big businesses will push payments they owe in June out to the start of July.”

Adding to the June squeeze on cash flow is the fact that many small businesses embark on a spending spree as the financial year draws to a close. The government offers an instant $20,000 tax write-off for some capital investments. It’s the last chance for small businesses to claim the cost of new vehicles and office equipment as a deduction for the financial year, says Solomons.

Other businesses use June as a time to bring expenses forward, says Mark Lawry, partner at accounting firm Suntax just outside Melbourne. He says many of his clients load up into superannuation in June because it increases their expenses and reduces their tax bill.  He also gets clients who prepay their rent for up to 12 months so they can get a tax deduction in June.

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