Stimulus impact: SMBs with no cash flow issues tripled during past year

There’s been a dramatic drop in the number of businesses reporting cashflow issues, with three times as many SMEs as usual saying they had no cashflow problems in the past year.

This result, in ScotPac’s SME Growth Index, points to business owners holding on to their cash in the face of extraordinary economic conditions and uncertainty around border closures.

ScotPac CEO Jon Sutton said it also was a marker of the impact of federal and state government support initiatives to help the small business sector with pandemic recovery.

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% of the 1253 businesses polled experienced no cash flow issues in the past 12 months.

In the 2018 and 2019 rounds of research, a much smaller figure of only 9.5% to 10% of small businesses reported having no cashflow issues.

Fast payment to create cash flow boost for SMEs

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

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

“This reinforces the importance of prompt payment for SMBs, 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 cashflow woes

Mr Sutton said despite governments making a concerted effort to ease the pressure on the SME sector, “government red tape and compliance” was the main cause of cashflow issues reported by small businesses (reported by 44% of respondents).

This issue has consistently topped the list of small business cash flow concerns since 2014.

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

One in seven SMEs were unable to take on new work due to cash flow restrictions – this may have had the effect of prolonging the COVID downturn for many sectors.

“It’s telling that three quarters of small businesses experienced cashflow issues despite the low interest rate environment and extensive SME loan support options available,” he 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

The 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 sensible strategy was much more prevalent for large ($5-20m revenue) SMEs, with 49% planning cash flow forecasting as opposed to only 9% of smaller SMEs ($1-5m revenue).

The other main cashflow 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.

“There has been a 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.”

“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.” 

Twice a year since 2014 market analysts East & Partners conduct this research, Australia’s longest-running in-depth research on small business growth prospects. A representative national sample of 1253 $1-20m revenue businesses were surveyed and interviewed.