Xero, a small business platform, has worked with Accenture to produce two reports in 2022 about cash flow challenges affecting small businesses. The reports review businesses from Aotearoa New Zealand, Australia and the United Kingdom. This article looks at key insights into the Aotearoa New Zealand small business market and ways that businesses can identify and turn around cash flow crunches when they do happen from time to time.
“Positive cash flow, when inflows exceed outflows,
creates a cash buffer that provides the control and flexibility
required for effective business operations.”
How common is cash flow stress?
Most small businesses experience at least one month of negative cash flow each year. In fact, nine out ten businesses (in Xero’s database) are in this situation. On average, small businesses are cash flow negative for four months of the year. For businesses with a cash surplus, they can ride out short term unexpected or planned negative cash flow, but at some point, there will be a cash flow ‘crunch’ for any business.
In 2021, Xero reported that Kiwi small businesses had 45% of their invoices paid late, and 8% of invoices were paid more than a month after they were due. Kiwi small businesses are defined by Xero for these reports as businesses with annual sales less than $30m.
“Late payments cost Kiwi small businesses
$456 million per year”
Why is positive cash flow important?
Positive cash flow (money in the bank!) allows business to plan, grow and take advantage of business opportunities as they arise. Positive cash flow also allows business owners to build cash reserves and offset planned negative cash flow periods. Having a cash buffer or contingency plan for an unexpected expense or economic scenario is a prudent approach to safeguarding your business, your staff and your income.
What is the impact of negative cash flow?
If you have cash reserves or a cash buffer, you’ll be able to ride out short term negative cash flow. When negative cash flow continues for extended periods, a business will need to restrict the activities of its business operations. This could mean reducing staff numbers, cutting expenses, not being able to pay debts or asking for extensions on monthly bill payments. It will hamper a business’ ability to apply for credit and business owners may need to sacrifice some or all of their salary to keep the business afloat. Ongoing or repeated periods of negative cash flow can result in businesses going under.
Businesses with more than six months of negative cash flow in a year demonstrate chronic cash flow stress. In 2021, Xero reported 17% of Aotearoa New Zealand small businesses as being in this situation.
It’s worth noting that like many developed countries, Aotearoa New Zealand businesses were supported by the government during Covid-19 lockdowns and closed borders. This provided many businesses with temporary cash flow relief and allowed their doors to stay open and pay their staff (sometimes at reduced rates). In 2022 we’ve seen the end of government support, borders reopening and Covid-19 anxiety reducing, but businesses have still experienced restricted operations. They’ve also been hit with increasing operating costs including essential goods, transport, petrol and rent.
How to identify cash flow issues early
Understanding cash flow triggers can help you to plan and anticipate potential cash flow crunch times in your business. The September 2022 Xero Report helpfully explains the three cash flow issues to watch out for.
“It’s essential the government and the business community
tackle avoidable cash flow stressors like late payments
and relieve expenses pressures where they can.”
1. Late payments
With half of all payments to small businesses paid late (6.3 days late on average for Kiwi businesses), late payments cost Aotearoa New Zealand businesses $456 million each year. In 2021, Xero found that businesses that had 60-80% of their payments paid late, were more likely to experience a cash flow crunch. Kiwi businesses with a significant volume of late payments had 19% increase in cash flow crunches compared to businesses with less than 20% late payments. Remember, in 2021, Xero reported that Kiwi small businesses had 45% of their invoices paid late, and 8% of invoices were paid more than a month after they were due.
What can you do about late payments?
Ensure your customers have online payment options, and set up your accounting system to issue automatic reminders when invoices are overdue. If you’re struggling to get your customers to pay, have a read of our article about debt recovery techniques .
IPromise has recently added a Xero integration to support cash flow management. All IPromise approved quotes and invoices are copied into Xero, reducing our client’s payment administration time by up to 80%.
2. Rising expenses
Increasing inflation and transport costs are impacting most Kiwi businesses without exception. Whether your business is impacted by an increase in the cost of raw materials, or more expensive finished products, increasing shipping, supply chain disruption and petrol prices are also increasing the cost of goods. For service based businesses, the cost of staff and lack of staff is the key issue for ensuring work is completed and service agreements can be met. In October 2022, Aotearoa New Zealand reported annual inflation of 7.2%. Inflation, labour shortages and labour costs all contribute to increased operating expenses and reducing cash flow from month to month. Xero analysis reported a 14% year on year increase in expenses for Kiwi businesses.
What can you do about increasing expenses?
There’s never been a better time to review your monthly profit and loss statement and assess where you could trim costs. Think about subscriptions you may not be using, suppliers that could offer you better pricing, and negotiate with current suppliers for bulk purchases or discounts for prompt payment.
3. Seasonal slowdowns
If your business has seasonal highs and lows, cash flow will be tighter at certain times of the year. Unless your business is in the tourism or hospitality sector, or based in one of our many tourist hotspots, you’re likely to experience an income downturn of the traditional summer holiday period (December – February). Xero reports that Kiwi small businesses tend to make 7% of their annual revenue in January and February, 20% less than the rest of the year.
What can you do about seasonal slowdowns?
Plan, plan, plan. If you expect a slowdown at a certain time of the year, you’ll need to put money aside at other more cash liquid times of the year to make up for this sluggish period. Many businesses look at diversifying their businesses to compensate for this – think of the surf shop that also sells snowboarding gear. If you’re in the construction industry, think of staggering your team’s leave so that rather than the traditional downing of tools for the month of January, you have some staff available to continue working through this period.
If you’re keen to reduce your cash flow headaches, then the IPromise app with its guaranteed customer payments can be a game changer. The reassurance that you’ll be paid immediately after the agreed job is completed can enable you to get on with doing the parts of the business you really enjoy. Remember, one of the key cash flow triggers is late payments.
IPromise also seamlessly integrates with Xero accounts and automatically copies all IPromise approved quotes/invoices into Xero reducing payment administration time by up to 80%.
Whether you work in Professional Services, Construction, Consulting, Manufacturing, or any other service-based industry, IPromise will add payment security, improve cash flow, reduce administration time and enable open, easy communication for your projects.