Xero, the global small business platform, today released Crunch: Cash flow challenges facing small businesses, Part II, a Xero Small Business Insights special report which identifies late payments, rising expenses, and seasonal slowdowns as causes of cash flow ‘crunches’.

Prepared by Accenture with the support of Xero, the report analyses comprehensive inflow and outflow data from over 200,000 businesses across Australia, New Zealand and the United Kingdom to understand ‘cash flow red flags’ – the early warning indicators that a small business is heading for cash flow trouble.

It found that 48 percent of invoices issued by Aussie small businesses in 2021 were paid late, with 10 percent paid more than a month after they were due.

On average, small businesses in Australia are paid 6.4 days late, costing small businesses $1.1 billion per year due to payment delays.

Rachael Powell Chief Customer Officer, Xero

Late payments create a flow-on effect for small businesses, creating unnecessary accounting complications

“Late payments create a flow-on effect for small businesses, creating unnecessary accounting complications and threatening owners’ ability to meet their own obligations – such as rent or wages – in time,” said Rachael Powell, Chief Customer Officer, Xero. “While increases in expense costs and seasonal fluctuations in demand are often beyond our control, small businesses and national economies alike can send a clear message that late payments aren’t acceptable, and come together to develop policies and penalties for those who refuse to take the hint.”

In its analysis of Australian small businesses, the report found that:

• Those that received the majority (60-80%) of their payments late experienced 17% more cash flow crunches (where cash outflows exceed inflows) compared with small businesses that were generally paid on time.
• While utilities costs remained relatively stable in 2021, Aussie small businesses have faced sharp increases in rental costs and payroll expenses, which rose 9 percent year-on-year (y/y) and 13 percent y/y respectively in the last quarter of 2021.
• The average Australian small business tends to experience a revenue speed bump in January and February, receiving nearly 20 percent less revenue in each of these months than the other 10 months of the year.

Joseph Lyons, Managing Director, APAC, Xero, said: “Aussie small businesses are facing rising expenses - amid a sharp uptick in rent, energy, fuel and payroll costs that started last year.”

“These pressures are unlikely to subside anytime soon, making cash flow stress one of the big issues for small businesses in the coming months. In this climate, it’s more important than ever that we take serious action in cracking down on avoidable late payments and equipping small businesses to build cash reserves for those leaner months.”

Late payments, rising expenses and seasonal slow downs a global issue

Crunch: Cash flow challenges facing small businesses, Part II follows on from Part I, which was launched in July. The three cash flow red flags identified – late payments, rising expenses and seasonal slowdowns – put ongoing pressure on small businesses in each of the three countries analysed (Australia, New Zealand and the United Kingdom). Reducing late payments to affect less than 20 percent of invoices could reduce negative cash flow months by up to 17 percent for some businesses.

To minimise and counteract cash flow red flags, the report makes several recommendations, including that small businesses consider adopting online invoice payment options for faster payment; or work with their accountant or bookkeeper to stay on top of government programs that offer payment plans to assist relief for rising costs of small business to smooth out expenses.

“If small businesses and their accounting partners and governments can actively look out for these red flags in their financial data, they’ll find it easier to work together on ways to anticipate cash flow crunches and avoid them with better planning and more timely action,” said Powell.

The report, including the insights and analysis contained within it, was prepared using Xero Small Business Insights data, publicly available data and Accenture estimates for the purpose of informing and developing policies to support small businesses.

The report and its findings was released during Xerocon Sydney, one of the world’s premier events for cloud accounting leaders, where delegates from Xero’s Australia, New Zealand and Asia accounting and bookkeeping and Xero app partner community have gathered at Sydney’s ICC to hear the latest from industry leaders and updates from Xero.