Small business could be headed for cash crunch

Posted by James Ferre on 1st September 2008

Many Australian small businesses are headed for a cash crisis in the wake of the global credit crunch, a CPA Australia survey* has shown. The survey has prompted CPA Australia to produce a guide to help business through tough times.

The latest CPA Australia Small business survey showed that cash flow problems and pressure on profit margins were being experienced by many small businesses. Increasing the likelihood of these becoming worse is a finding that many smaller enterprises may not be undertaking normal business processes, such as preparing cash flow forecasts or chasing up late payment of debts.

CPA Australia business policy adviser Gavan Ord advises small business owners to have financial management processes in place to ensure they are not caught out by the downturn. “In the current economic climate especially, business owners don’t want to be caught short by not knowing what’s going on. This survey reinforces the need for businesses to have relatively simple processes in place in order to manage their finances,” he said. “It found that 41 per cent of respondents never prepare cash-flow forecasts, and 25 per cent never chased up late payments. That could be a recipe for disaster.”

“Keeping your books up to date, preparing budgets, including cash flow forecasts and comparing actual results against budgeted results are essential to the proper management of business. The information this provides puts business in a far better position to manage their cash resources and their profitability than they would be otherwise,” Mr Ord added. “Cash is fundamental to the operation of a business. Even profitable companies may still experience problems if they do not manage their cash flow effectively.”

About 72 per cent of small business operators would seek a short-term injection of funds in times of financial difficulty and 71 per cent believe their financial institution will be accommodating and flexible in such circumstances. “This has potentially serious implications for some businesses. It means that many businesses will need to look at unlocking their hidden cash to improve their cash flow rather than rely on external sources of finance,” Mr Ord said. “The key to finding such hidden cash is updated financial records. Financial information and forecasts can also assist small business owners by giving them an early indication that a business is heading into financial difficulty.”

Other key findings in the survey included:

* 39 per cent of small businesses that have borrowed funds, do not know the interest rates on those borrowings
* small business confidence remains reasonably high with 66 per cent of those surveyed expecting their business to grow in the next few years
* 36 per cent of those surveyed had to borrow in the past year for business survival, with banks the most common lender
* 69 per cent of those surveyed prepared financial statements at least quarterly. With rising costs, financial statements become increasingly important as they give business owners the ability to track and respond to these cost increases so that they can maintain profit margins.

Mr Ord said the relatively high levels of confidence among small business owners could be attributed, in part, to the economic prosperity of the past decade. “Many small business owners wouldn’t have experienced an economic downturn, having run businesses only through the buoyant conditions of the past decade, and so may be relatively unprepared,” he stated. “Good business practices are even more crucial in a tougher business climate.”

*The CPA Australia Small business survey was conducted in May 2008. It comprised a nationwide sample of 500 small businesses (up to 20 staff) and 200 CPA Australia members in public practice with small businesses as clients.