Data shows SMEs struggling with negative cash flow

Cash flow challenges are undermining the growth and operations of New Zealand firms. Photo / Getty Images

Data from small business accountancy firm Xero shows 95 per cent of Kiwi small businesses experience at least one month of negative cash flow each year.

The average small business struggles with negative cash flow for a third of the year, with one in six (approximately 17 per cent) facing cash flow crunches – where monthly expenses are above revenues – for more than six months each year.

Xero's Small Business Insights special report found cash flow challenges are undermining the growth and operations of 9 in 10 small businesses in this country. New Zealand businesses were found to be feeling the pain of cash flow crunches the most when compared with British and Australia counterparts.

One in six Kiwi firms experiences intense cash flow stress, being cash flow negative more than six months each year, compared with one in five in Australia and one in four in Britain.

The report analysed comprehensive data from more than 200,000 businesses across Australia, New Zealand and the United Kingdom. It outlined that cash flow was "a persistent and systemic challenge".

Xero director of business growth Charlie Nicholls said cash flow challenges were a major barrier to small business success, and especially damaging during periods of prolonged inflationary pressure.

"The rising cost of living and inflation is starting to impact consumer behaviour, translating into less money available to spend with local small businesses," said Nicholls.

"It's increasingly important Kiwi small business owners ensure their customers pay on time as a key step towards improving cash flow. That sort of volatility can introduce huge amounts of uncertainty to how owners invest in sustaining and growing a small business, directly compromising their livelihoods and those of many in the community."

Nicholls said more work was needed to stabilise cash flow for small firms and to ensure the economy reached its full potential.

"Maintaining healthy cash flow is an essential ingredient for a thriving business," the report outlined.

"Positive cash flow, when inflows exceed outflows, creates a cash buffer that provides the control and flexibility required for effective business operations. Negative cash flow hampers this control and flexibility, stifling the ability to thrive and grow. So much so, studies have shown that poor cash flow management is a common contributor to business failure."

Despite cash flow being a challenge most businesses grapple with, the cash flow positions of most small businesses was found to have actually improved through 2020 and 2021. The report outlined that this was due to government support provided to firms during the Covid-19 pandemic, along with some firms being able to "

In New Zealand, the average small business experienced four months of negative cash flow in 2021, 0.3 months fewer than in 2019, while in Australia, the average small business experienced 4.2 months of negative cash flow in 2021, 0.2 months fewer than in 2019.

In Britain, the average small business experienced 4.5 months of negative cash flow in 2021, 0.2 months fewer than in 2019.

Xero economist Louise Southall told the Herald the cash-flow crunch was more profound for small firms operating in the hospitality industry, compared to the likes of professional services which were found to be less impacted.

She said firms that were able to switch to working from home during the pandemic generally experienced fewer cash flow issues compared to those such as restaurants and bars that had no choice but to temporarily close.

"This is an issue all small businesses have to deal with, and I think the fact that 95 per cent of New Zealand businesses have at least one month a year where expenses are outstripping revenue - and an average of four months a year - that really hits home how widespread it is, and that it isn't just an issue for one particular industry," said Southall.

She said the findings highlighted that the cash-flow crunch was not a pandemic problem, and rather one that had been around for many years and "as a result needed some long-term solutions".