Australian businesses are being caught short with many unable to effectively manage cash flow amid rising inflation and interest rates. With careful planning however, this scenario could be avoided.
Some business owners, particularly those in the SME sector, often deem cash flow management too complex and assume a more reactive approach. They see the easier option being to react to issues as they arise, but this approach carries substantial risk and can result in missed opportunities.
Cash flow concerns are one of the more stressful things a business owner can go through, so identifying issues early enough is critical to stemming further losses down the track.
A recent survey conducted by accounting software provider Xero found nine out of ten small businesses struggle with negative cash flow at least once a year and one in five are plagued for six months with expenses greater than revenue.
Furthermore, 92 per cent of small businesses experienced at least one month of negative cash flow in 2021, and for 20 per cent of them, it lasted more than six months. The average small business went through 4.2 months of negative cash flow in 2021.
Increased inflationary pressures continue to be one of the more significant issues for business owners, as it can have a major impact on cash flow. Other reasons for cash flow issues include industry disruption, businesses taking on too much debt, debtor collection issues, and investment in equipment following a period of growth and scale.
While cash flow concerns are likely to persist given the ongoing economic uncertainty, there are steps business owners can take in better managing cash flow, including:
- Understanding fixed costs: what are they? Are they going to change at all in the coming year? Has anything changed from last year?
- Understanding your business strategy: what is the business strategy for the next 12 months and beyond? Does the business have a growth strategy? Are you in a period of sustain and defend? Are you in a period of transition? How will your strategy impact your cash flow
- Protecting profit margins: what is your pricing strategy? Do you need to re-evaluate your product mix or suppliers to maintain a profit margin?
- Forecasting: once you understand your fixed and variable costs and how they will be impacted by your strategy, the next step is to put it all together with what you know about the timing of your cashflow to create a forecast.
- Monitor, manage and refine: businesses and families change over time, so the plan also needs to change.
Importantly, business owners should remember there are many factors, such as inflation, beyond their control, and they should instead focus on what you can control by being proactive and planning for all eventualities.
This article was first published in the Summer 2022-23 issue of Financial Times.