Poor cashflow costing SMEs a likely $200 billion revenue boost

It’s no secret that cashflow is an issue for Australia’s small-business sector. Multiple surveys each year, including our own Scottish Pacific SME Growth Index, highlight this fact.

Cashflow is always one of the top barriers to growth mentioned by the more than 1200 small-business owners and managers polled twice a year for our SME Growth Index (the other main barriers being multiple taxes, and access to and conditions of credit).

In this round of the SME Growth Index, our research partner East & Partners drilled down further to help us get an indication of just what poor cashflow is costing SMEs.

How many SMEs are happy with cashflow? Not many

When asked about their satisfaction with cashflow in 2016, only 8.5 per cent were happy – that is, almost 92 per cent of those surveyed thought cashflow could be better.

This was across the 1200 businesses polled, including growth, stable and declining small businesses. When we drilled down just to growth businesses, only five per cent were satisfied with their cashflow, and felt poor cashflow was costing them revenue.

Seven out of 10 growth SMEs said if their cashflow was better in 2016, they could have produced at least 10 per cent revenue growth, and almost a quarter said the revenue increase would have been 25 to 50 per cent.

Across the 1200 businesses polled, SMEs estimated that better cashflow would have given them an average 18.7 per cent revenue boost in 2016.

East & Partners analysis is that, based on the $1 million to $20 milion annual revenue SME segment contributing $1.3 trillion to the economy (ASB data), this 18.7 per cent represents a staggering $222.5 billion in additional revenue that small business missed out on in 2016 due to cashflow issues.

The Index found strong indications that improving cashflow early in the life of a business has a major long-term impact on revenue growth.

Some 96 per cent of the segment with $1 million to $5 million annual revenue businesses agreed that better cashflow would have increased their 2016 revenue (with an average improvement of 23 per cent); 85.5 per cent of $15 million to 20 million businesses agreed, with an average revenue increase of 11 per cent.

What can small business do to improve cashflow?

There are dozens of small steps that can help improve cashflow. One major issue is ensuring you have the right working capital solution for your business. With interest rates so low and many non-bank funders in the market, including Scottish Pacific, SME access to credit should not be an issue. And yet the SME Growth Index shows that access to, and conditions of, credit are two of the top three barriers to SME growth.

The Index has also tracked the trend away from the banks when it comes to small business looking for capital to grow. Latest results show a record percentage of businesses plan to use non-bank financing (22 per cent, doubling from 11 per cent in Round One of the SME Growth Index in September 2014). This contrasts with declining bank borrowing intention (29 per cent, significantly down from 38 per cent in Round One).

ASBFEO’s Small Business Loans Enquiry has recently highlighted the need for a fast solution for small businesses over access to finance. It’s important for SMEs and their advisers to be across the full range of finance options available to them. These options could include well established invoice and trade finance alternatives, or newer P2P lending or crowdfunding, depending on the size, life stage and growth plans of the business.

The ball is in the court for SME owners, managers and their advisers to take the time to carefully research the right options to help them solve the cashflow conundrum forever.

To receive a free copy of the Scottish Pacific SME Growth Index, register here: https://www.scottishpacific.com/news/research.

Peter Langham, CEO, Scottish Pacific