As the venture capitalist Fred Adler once said: “Happiness is a positive cash flow.” Yes, positive cash flow keeps small businesses running, while negative cash flow can keep them up at night. A business with more money going out than coming in often isn’t long for this world.
That’s why we wanted to make cash flow a key focus of our Small Business Insights analysis. We wanted to know what proportion of UK small businesses were cash flow positive each month, which periods of the year saw money at its tightest – and, of course, when cash flow is most abundant.
To find answers to these questions, we drew on aggregated data from hundreds of thousands of Xero subscribers in the UK. We anonymised all information before aggregation to remove all names and other potential identifiers. To get the most vivid and detailed picture of their cash flow, we traced their history over a period of three years.
The results revealed much about the ins, outs, ups, and downs of small business finances.
When does cash flow?
Overall, 49.9% of these UK small businesses on Xero are cash flow positive in any given month: at 50.1%, a clear – albeit slight – majority are cash flow negative. This doesn’t mean that most of our respondents are in trouble: incomings and outgoings can be highly variable at different times of the year. Over the past year, cash flow positivity hit highs of 51.7% (October) and 50% (November) in the months preceding December and lows of 46.4% following in January 2018.
“The festive period’s always crazy busy for us”, says Sam Feller, Chief Popper at Popcorn Shed, a premium gourmet popcorn business. “We’re always frantically delivering popcorn to our customers in the run-up to Christmas. This is typically an indulgent time of year and many of our clients are trying to use up their budgets before they’re renewed in January. It’s a good thing too because January’s often a fairly tricky month to manage in terms of cash flow!”
So it follows that cash flow positivity is at its highest before December and that in the months after there are rapid declines. In 2017, January saw 56.4% of these businesses in negative cash flow: a combination of increased festive spending, lower productivity (due to annual leave), impending tax and VAT payments, and year-end bonuses all contribute to tighter finances.
Cash flow cycles
There’s also a dip between the last month of a quarter and the first month of the next one – corresponding with VAT payment deadlines. “VAT submissions obviously have an impact on cash flow”, said Edward Berks, EMEA Director, Fintech & Ecosystem at Xero. “Managing payments and ensuring that they’re made in good time can be costly, in terms of both time and money. Setting up processes that require minimal human resources that can guarantee timely, accurate submissions should be an operational priority for every business.”
Beyond the beginnings and ends of years and quarters, we spotted further trends in the cash flow cycle. August and February, for example, tend to be negative cash flow months. They’re frequent holiday periods, businesses become less profitable, decisions take longer to make, and invoice payments are delayed.
A modern, effective cash flow strategy requires technology. By employing the right tools, you can create robust accounting processes that simplify the process and eliminate the man hours involved. By digitising cash flow management, you can spot problems before they arise and avoid those sleepless nights.