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Dramatic drop in SMEs reporting cash flow issues but woes still exist

Karen Tan
07 June 2021 3 minute readShare

Cash conservation is behind a dramatic drop in the number of businesses reporting cash flow issues, with three times as many SMEs as usual saying they had no cash flow problems in the past year.

According to the latest ScotPac SME Growth Index, the federal and state government stimulus have helped the small business sector with pandemic recovery.

ScotPac CEO Jon Sutton said it appears many business owners are holding on to their cash in the face of extraordinary economic conditions and uncertainty around border closures.

That is not to say cash flow concerns don’t exist. The data also shows three in four businesses are still struggling.

The 2021 first-half results of the SME Growth Index, Australia’s longest-running in-depth research on small business growth prospects, found 27.5 per cent of the 1,253 businesses polled experienced no cash flow issues in the past 12 months (72.5 per cent said they had cash flow problems).

In the 2018 and 2019 rounds of research, a much-smaller figure of only 9.5 per cent to 10 per cent of small businesses reported having no cash flow issues.

Fast payment would create game-changing cash flow boost for SMEs

Mr Sutton said fast payments would create game-changing cash flow boosts for SMEs.

“If SMEs never had to wait for payment, they estimate they would hold an average 42.8 per cent additional working capital in their business,” Mr Sutton said.

“Fledgling businesses (five years or under) have on average 59 per cent of their working capital tied up in unpaid invoices, while for older businesses it is 36 per cent.

“This reinforces the importance of prompt payment for small businesses, and for business owners to look for funding solutions that can smooth out cash flow if they are having to wait for payment.”

Main causes of cash flow woes

As for the main causes of cash flow problems, Mr Sutton said “government red tape and compliance” was largely responsible, according to 44 per cent of small business respondents.

This issue has consistently topped the list of small business cash flow concerns since the first SME Growth Index in 2014.

Other common causes of cash flow difficulties were due to businesses trying to meet tax payments on time (24 per cent), being declined from a lending product (23 per cent), suppliers reducing payment terms (21 per cent), customers paying late (20 per cent) and having their credit lines reduced (16.5 per cent). 

The report found one in seven SMEs were unable to take on new work due to cash flow restrictions, and this may have prolonged the COVID downturn for many sectors.

“It’s telling that three-quarters of small businesses experienced cash flow issues despite the low interest rate environment and extensive SME loan support options available,” Mr Sutton said.

“Cash conservation moves by small business owners is understandable given the year they’ve had. The concern is that conserving cash means they are not actively looking to invest in their business to grow, so they run the risk of becoming less relevant in their market.”

Strategies SMEs plan to use to control cash flow

In the wake of the coronavirus pandemic, the ScotPac research found that small businesses are planning new strategies to manage working capital.

More than one in four businesses plan to focus on cash flow forecasts. This strategy was much more prevalent for large ($5 million to $20 million revenue) SMEs, with 49 per cent planning cash flow forecasting as opposed to only 9 per cent of smaller SMEs (in the $1 million to $5 million revenue bracket).

The other main cash flow strategies nominated by small businesses were:

  • One in six intend to use invoice finance to smooth out revenue peaks and troughs
  • One in nine will look to online funders
  • One in nine will rely on their personal finances (such as credit cards) for business expenses
  • One in 10 will look to a new or expanded overdraft

Mr Sutton said it was a red flag for the SME sector if businesses continued to conserve cash rather than put in place funding strategies that could drive growth.

“SMEs said they are trying to grow revenue via new and existing customers, but so many also indicated that they are not looking to invest in the business to grow that revenue,” he said.

“In the pandemic aftermath, there has been a markedly low uptake of the government’s bank loan initiatives, with business owners understandably unwilling to add more debt on to already over-leveraged balance sheets.

“However, the result of this reticence is that many businesses have looked at funding and kicked the can further down the road, instead of sourcing more appropriate business funding solutions.

“If businesses do have cash reserves off the back of stimulus and being more conservative to get them through the pandemic, a great use for those cash reserves is to see an expert adviser to guide you into wise decisions about rebounding, growth and how to fund it.”

SME Growth IndexTwice a year since 2014, market analysts East & Partners conduct this research, Australia’s longest-running in-depth research on small business growth prospects.

ScotPac is Australia and New Zealand’s largest non-bank business lender, providing funding to small, medium and large businesses, from start-ups to enterprises exceeding $1 billion revenues.

Dramatic drop in SMEs reporting cash flow issues but woes still exist
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Karen Tan

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