Cash flow crunch: Delving deeper into the cash flow challenges affecting small businesses

I’m so thrilled to be back at Xerocon London connecting with so many of our accounting and bookkeeping partners and app partner community. It’s been such a long time since we were all able to be together in person, and it’s great to be making real-life connections again.  

As we all begin to navigate this post-pandemic business environment, it’s clear that many small businesses have faced huge challenges. These range from navigating restrictions, to retaining or hiring staff, to keeping the shelves stocked, and much more. One ongoing challenge we know nearly all our small business customers can relate to is cash flow. 

Healthy cash flow is essential to a thriving business, yet our latest research shows that more than 9 in 10 small businesses face at least one month of negative cash flow – a cash flow crunch – a year.

As part of the Xero Small Business Insights (XSBI) program, today we released Crunch: Cash flow challenges facing small businesses – a special report examining cash flow challenges facing small businesses. We’ve drawn on data from more than 200,000 businesses in Australia, New Zealand, and the United Kingdom to better understand the extent of the problem. And, we’ve offered some insights into how small businesses can improve their cash flow management to stay afloat, hire, and grow.

Negative cash flow – when expenses in a given month exceed revenue – can create significant challenges for small businesses, particularly those with limited access to credit. It can lead to mounting expenses, unpaid wages, lost jobs, and owners dipping into personal savings and equity to keep their company afloat. If cash flow crunches become a chronic and repeated occurrence, the business will ultimately fail.

Cash flow crunches are a chronic issue for many small businesses

While over 90 percent of small businesses experience at least one cash flow crunch each year, many suffer 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 United Kingdom. These worryingly high figures highlight that good cash flow management is more easily said than done.

Most small businesses can get back on track after a brief period of negative cash flow. But for some, cash flow stress is more severe and ongoing. In the UK, nearly a quarter (23%) of small businesses experienced more than six months of negative cash flow in 2021, a potential indicator of chronic cash flow stress. This compared to one in five small businesses (20%) in Australia and one in six (17%) small businesses in New Zealand. The high rates of cash flow crunches and the resulting impact on a business’ day-to-day operations really reinforces the need for small businesses owners, with the support of their advisers, to understand the reasons for their cash flow stress.

The cash flow positions of most small businesses improved throughout 2020 and 2021

The report also highlighted a surprising result: the cash flow positions of most small businesses actually improved in 2020 and 2021. This was mainly due to the government support provided to businesses during the COVID-19 pandemic. It also reflects the great lengths many business owners went to in order to keep afloat – cutting costs such as inventory or casual staff wages and temporary measures such as rent deferrals. Some businesses were able to maintain or grow their revenues during the pandemic – whether that was through changing their business model or due to an increase in demand for their services.

So although cash flow is an important measure of business health, it isn’t the full picture. While many businesses remained cash flow positive through pandemic conditions, they were far from thriving as their overall operations and sales were impacted by ongoing lockdowns.

How to beat the crunch

Regular cash flow crunches affect the control and flexibility small business owners need to effectively run their business, and they stifle the ability to thrive and grow. It’s an issue that most small businesses will face each year, but understanding the problem in the first place is the best place to start.

Accountants and bookkeepers can help their small business clients to beat the crunch by working closely together to understand their position.

Small business cash flow crunch checklist:

• How many cash flow crunches has the business had in the last 12 months?
• Have you identified areas in the accounts for improvement, and have you discussed these with your client?
• Have you worked with the business on a budget that allows them to anticipate cash flow crunches and empowers them to plan ahead for the difficult months?
• Is your client using the Budget Manager within Xero to prepare budgets and help to keep on top of cash inflows and outflows?
• Does your client need additional help? Many government agencies are willing to help small businesses suffering from temporary cash flow crunches. The earlier you speak to these agencies, such as tax offices, the sooner they can put in place a payment plan to help you through. 

Read the report for more insights into the cash flow crunches affecting small businesses. And, keep an eye out for our follow-up report, which will highlight the red flags that small businesses and their advisors should look out for when it comes to cash flow risk. Part two will be released in the coming months.