The five cash flow hurdles inhibiting small businesses

A smooth and reliable level of working capital is essential to the success of any business and with the current economic challenges, it’s becoming harder for businesses to maintain this.

Recently released data from accounting platform Xero shows one-third of Australian small business owners are unable to pay themselves due to cash flow challenges and 27 per cent are being forced to dip into their personal savings to mitigate rising costs.

Inflation has greatly impacted Australian businesses’ cash flow over the past six months. Rising costs and changing consumer behaviour have seen a shrinking profit margin for many businesses, putting a strain on working capital, but conversely, it is also during periods of growth that we see small businesses really struggling with their cash flow.

Top 5 cash flow hurdles

1. Lending Restrictions

It’s a tough time for any small or medium business owner to obtain bank finance with access to working capital becoming harder to come by. Banks have tightened lending criteria making it difficult to obtain loans or raise credit limits.

2. Slow Paying Customers

Many large companies have invoice terms as high as 60 days, which is a long time to wait to be paid after you have delivered your goods or services to your customers. Slow payments can hurt a businesses cash flow if they don’t have a facility like invoice financing in place.

3. Rapid Expansion

Companies that grow too quickly can find themselves struggling to maintain cash flow. A combination of increased overheads like materials, equipment, staff and expanded equipment sees them drain their cash supply to meet orders. Without a cash flow injection these companies may have to turn away orders as they wait to get paid from the last.

4. Seasonal income

Businesses that raise most of their income in one part of the year can find they run out of funds if they don’t diligently manage their expenses. Companies making seasonal goods such as beachwear, Christmas items or seasonal rural products are examples of this. They are usually an excellent candidate for invoice financing so they have the cash at hand to fulfil orders when the season changes and their business picks up.

5. Lack of customer credit checks

Many Australian businesses experience cash flow problems because a major customer goes bankrupt, exposing them to bad debt.

Do your due diligence when it comes to customer credit checks and set reasonable limits for companies with poor credit history. Avoiding defaults and late payments could stop your company from going broke. All invoice finance facilities provided by OptiPay have the added benefit of Trade Credit Insurance included, thus mitigating this risk.

It’s important for business owners to realise that profit and cash flow are not the same thing. You can have a profitable business on paper and not have a dollar in the bank. We’ve seen a huge increase in the number of businesses seeking invoice financing as a way of maintaining their cash flow and enabling growth.

It’s a widely used form of business finance overseas and Australian businesses are starting to realise the benefit when faced with current cash flow challenges.

Our team are here if you need help with your business’s cash flow. You can contact our team here.

Source: Flying Solo September 2023
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