According to Xero’s just-released Crunch: Cash flow challenges facing small businesses insights report, 92 per cent of Australian small businesses experience at least one month of negative cash flow per year, with these challenges undermining the growth and operations of at least nine in ten small businesses.

The report analysed comprehensive inflow and outflow data from more than 200,000 businesses across Australia, New Zealand and the United Kingdom to understand the extent of cash stress currently being experienced by small businesses.

The report found that the average Australian small business struggles with negative cash flow for more than a third of the year, with one in five facing cash crunches – where monthly expenses are above revenues – for more than six months each year.

“Chronic cash flow stress”

Rachael Powell, Chief Customer Officer at Xero, says, “Months of negative cash flow can leave small business owners struggling to pay essential costs like wages and rent. This, in turn, compromises the ability of small businesses to stay afloat, hire and grow.”

The report found that in Australia:

• 92% of small businesses experienced at least one month of negative cash flow in 2021, while one in five (20%) were impacted for more than six months – an indication of chronic cash flow stress.
• Performance improved during the 2020/21 period, with the average small business experiencing 4.2 months in the negative in 2021, compared to 4.4 months in 2019.

Xero Managing Director for Australia and Asia, Joseph Lyons, says while performance has improved since 2019, it’s not the time to celebrate.

“The fact that cash flow improved during the pandemic, despite spikes in cash crunches at the start of 2020, shouldn’t be a cause for celebration,” he says. “While government schemes like JobKeeper and JobSaver helped buoy businesses back relative to pre-pandemic levels, the apparent improvements also were the result of businesses drastically slashing expenses – often because they were forced to reduce trading hours and typically at the expense of investment, employee retention, and any cash buffers the business might have once held.

“Cash flow doesn’t give a full picture of small business health, but it does offer a strong indicator of how much pressure small businesses are facing, and we’ve seen little to no lasting improvement for Australian small businesses even post-pandemic. It’s clear we must do more to reduce the crunch for these small businesses,” Lyons says.

Get your bookkeeper on board

The report’s findings also indicate that small businesses can insulate themselves from cash crunches with the help of their accountants and bookkeepers – using their financial data to predict crunch periods and build up cash buffers ahead of time.

“Small business owners don’t have to sit back and accept regular cash flow trouble,” says Powell. “By working closely with their accountants and bookkeepers, they can beat the crunch by analysing their finances, anticipating periods when flow often dips into the red, and adjusting how they operate to improve their monthly position.”

Check out the full Crunch: Cash flow challenges facing small businesses report here.

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