MEDIA RELEASE: Too many Australian businesses are being caught short with many unable to effectively manage cash flow amid rising inflation and interest rates, according to HLB Mann Judd Sydney director of business advisory services, Andrew Ash.

Mr Ash said 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.

“Not having enough cash in the bank, or seeing your cash balance decline over time, is one of the more stressful things a business owner can go through but getting on the front foot is critical to mitigating issues further down the track,” he said.

According to a recent survey conducted by Xero, 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.

The survey also found that 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.

“There are many reasons why business owners are being caught short, and inflationary pressures is one of the more significant. Inflation has reduced demand for products and services, and it’s also leading to increased costs.

“Other reasons for cash flow mismanagement include industry disruption, the business taking on too much debt, debtor collection issues, and investment in equipment following a period of growth and scale,” he said.

Mr Ash said while cash flow concerns are likely to persist given the ongoing economic certainty, there are steps business owners can take in better managing cash flow, including:

• Start with what you know and what you can control: Understand fixed costs. What are they? Are they going to change at all in the coming year? Has anything changed from last year? Business owners may have been advised by some suppliers that costs are increasing, and interest rates are likely to rise from here too.

• Understand your strategy: what is the business strategy for the next 12 months and beyond? Do you have a growth strategy? Are you in a period of sustain and defend? Are you in a period of transition? Do you have a strategy regarding your margins? You need to be clear on where you are going and what you are trying to achieve for the business and as owners.

• Use your forecast as a crystal ball: 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. This will tell you if you will have negative cashflow at certain times of the year and it can be adjusted to see how changes to your strategy impact your cashflow.

• Monitor, manage and refine: Businesses and families change over time, so the plan also needs to change. To enable this, you should be monitoring, managing, and refining your cashflow constantly throughout the year.

Importantly, Mr Ash said business owners should remember there are many factors, such as inflation, beyond their control, and they should instead focus on being proactive and plan for all eventualities.

“If you create a forecast, put together a plan to manage the unexpected, review it continuously, don’t overextend yourself, get advice and build a buffer, then you will be on your way to never being caught short again,” he said.