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3x rise in SMEs reporting no cashflow problems in the past 12 months: ScotPac

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The number of businesses reporting no cashflow problems in the past year has dropped dramatically, thanks to the stimulus support packages and behavioural change in their cash usage.

The results from ScotPac’s SME Growth Index research found 27.5% of the 1,253 businesses polled experienced no cashflow issues in the past 12 months. This compares to 9.5% to 10% of small businesses reporting no cash problems in 2018 and 2019. The result from the study implies that cashflow woes still impact 72.5% or three in four businesses.

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

Fast payment can be a game-changer for SMEs

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

“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 small businesses, and for business owners to look for funding solutions that can smooth out cashflow if they have to wait for payment.”

ScotPac CEO, Jon Sutton

Main causes of cashflow woes

Mr Sutton said 44% of small business respondents blamed government red tape and compliance for cashflow issues. 

This issue has consistently topped the list of small business cashflow concerns since the first SME Growth Index in 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 cashflow restrictions, which may have prolonged  the COVID-19 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 to control cashflow

In the wake of the COVID-19 pandemic, the research found that small businesses are planning new strategies to manage working capital.

More than one in four businesses plan to focus on cashflow forecasts. This sensible strategy was much more prevalent for large ($5-20m revenue) SMEs, with 49% planning cashflow forecasting instead of only 9% of smaller SMEs (in the $1-5m revenue bracket).

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 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.

“In the pandemic aftermath, there has been a markedly 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.

“Yet, 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.”

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Yajush Gupta
Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.