London — 20 July 2022 — Xero, the global small business platform, today released Crunch: cash flow challenges facing small businesses, a Xero Small Business Insights (XSBI) special report which found cash flow challenges are undermining the growth and operations of at least 9 in 10 small businesses in the UK.
Prepared by Accenture, with the support of Xero, the report analyzed comprehensive inflow and outflow data from thousands of UK small businesses to understand the extent of their experience of cash flow stress.
The report found that the average UK small business faces cash flow crunches – where monthly expenses exceed revenues – for more than four months each year, with almost one in four (23%) experiencing it for more than six months each year. Worryingly, 94 percent of UK small businesses suffered at least one month of negative cash flow in 2021.
When examining specific industries, the report found that small hospitality businesses felt the brunt of the initial COVID-19 impact. The proportion of small firms that were cash flow negative in this sector peaked at 54 percent in July 2020.
On the other hand, professional service businesses fared relatively well both before and during the pandemic. They consistently saw one of the lowest amount of businesses experiencing negative cash flow in 2019 (38%), and this remained relatively unchanged throughout 2020 and 2021.
Cash flow a global issue for small businesses
UK small businesses are not alone, with cash flow challenges evident across the three countries profiled in the report.
Rachael Powell, Chief Customer Officer, Xero, said: “The latest Xero Small Business Insights report reveals just how persistent and systemic these cash flow challenges are for small businesses on a global scale. Healthy cash flow is essential to a thriving business, yet our research shows that the vast majority of small businesses are having cash flow issues at least once a year.”
More than 90 percent of small businesses in Australia, New Zealand and the UK experienced at least one cash flow crunch each year. Many are suffering for several months each year: on average, small businesses are cash flow negative for 4.2 months in Australia, 4.0 months in New Zealand and 4.5 months in the UK.
For some small businesses, cash flow crunches occur more regularly. In the UK, nearly a quarter (23%) of small businesses experienced more than six months of negative cash flow in 2021. This figure was one in five small businesses (20%) in Australia and one in six small businesses (17%) in New Zealand.
“These figures highlight that good cash flow management is more easily said than done. For many of these businesses that regularly experience cash flow crunches, prompt invoice payments and more support in budget planning could unlock huge growth opportunities,” says Powell.
Late payments fueling UK small business cash flow challenges
Xero’s EMEA Managing Director Alex von Schirmeister says the report reconfirms that small businesses are facing tough cash flow challenges and that the government needs to step up to address the UK’s late payments issue.
“Given the steady post-pandemic resurgence in cash flow issues that we’re seeing in the UK, we urge the government to help.”
Ensuring customers pay on time is the most crucial step towards improving cash flow. According to another Xero study, 55 percent of large organizations admitted to paying their small business suppliers later than the agreed payment terms in the last 12 months. This is despite 78 percent of respondents claiming they are aware of the impact this could have on the suppliers’ business.
The same study also found that more than four in five (81%) large businesses would be more likely to pay their suppliers on time if late payments were renamed as ‘unapproved debt’. This was a recommendation put forward to the government as part of Xero’s UK-wide late payments task force*, established in September last year.
Von Schirmeister added: “We’re seeing big businesses purposely withholding cash from their small customers. We must move away from calling it ‘late payments’ which legitimises poor practice and lacks urgency. It’s time we labeled this ‘unapproved debt’.
“There must be appropriate incentives for large businesses to pay their suppliers on time, and stricter penalties when it comes to paying late to prevent further cash flow instability. Larger companies have been let off the hook for too long. Just imagine how economically productive our small business economy could be without the toil and stress of chasing payments.”
The Crunch: cash flow challenges facing small businesses research was announced at Xerocon London, one of the world’s premier events for cloud accounting leaders. Taking a fresh perspective, more than 2,000 accounting and bookkeeping partners and the Xero app partner community are gathered over two days to hear the latest from industry leaders and gain expert insight into the newest Xero tools and features to help save time, grow their business and have a greater impact on their clients’ success.
The report, including the insights and analysis contained within it, was prepared by Accenture with the support of Xero, using Xero Small Business Insights data, publicly available data, and Accenture estimates for the purpose of informing and developing policies to support small businesses. A follow-up report investigating the cash flow “red flags” that can warn small businesses of impending cash flow challenges will be released in the coming months.
Notes to Editor
*The taskforce’s six recommendations to the government:
- * Renaming ‘late payment’ as ‘unapproved debt’: Moving away from language which legitimises poor practice and lacks urgency
- Building more transparency into regulation and reporting: Large firms should be called upon to report on how much “unapproved debt” they are using to finance their operations in their annual report or ESG/CSR reporting
- Redefining great workplaces to include how suppliers are treated: Schemes and initiatives that judge a company’s social contribution or employer standards should examine their payment practices and record
- Corporate reputation and publicity as a sanction: Making more of existing publicly available information through the creation of a ‘Glassdoor for suppliers’ to enable stakeholders to see how businesses treat their suppliers
- Underpinning legislation with a ‘Fair Buyers’ act: Introducing legislation which sets a minimum 30 days payment term for big firms paying small businesses
- Creating better educational tools to shape best practice: Better education options should be made available funded by the government for employees that lack financial expertise
Clemmy Perlmutter | +44 (07779) 982378 | email@example.com
Xero is a global small business platform with 3.3 million subscribers which includes a core accounting solution, payroll, workforce management, expenses and projects. Xero also provides access to financial services, and an ecosystem of more than 1,000 connected apps and more than 300 connections to banks and other financial institutions. Through Xero’s open platform, small businesses can connect to a range of solutions that help them run their business and manage their finances. For three consecutive years (2020-2022) Xero was included in the Bloomberg Gender-Equality Index. In 2021, Xero was included in the Dow Jones Sustainability Index (DJSI), powered by the S&P Global Corporate Sustainability Assessment. Xero has been named as a FIFA Women’s Football partner under FIFA’s new commercial structure.
Accenture is a global professional services company with leading capabilities in digital, cloud and security. Combining unmatched experience and specialized skills across more than 40 industries, we offer Strategy and Consulting, Song, Technology and Operations services — all powered by the world’s largest network of Advanced Technology and Intelligent Operations centers. Our 699,000 people deliver on the promise of technology and human ingenuity every day, serving clients in more than 120 countries. We embrace the power of change to create value and shared success for our clients, people, shareholders, partners and communities.
Related media and inquiries
For all media inquiries, please contact the Xero media team.
- Media release
Xero’s Small Business Index sees a return to sales growth, but struggle to fill vacancies continues
- Media release
Xero’s Small Business Index is at its lowest point since February 2021
- Media release
Xero and CEBR study highlights Covid’s emotional impact on entrepreneurs