Cash flow management is a key pillar of running a successful business, and its importance cannot be overstated. In this blog post, OptiPay delves into the importance of cash flow management for Australian businesses, supported by insights from surveys and research conducted in the country.
Navigating seasonal fluctuations and cycles:
According to a survey conducted by the Australian Small Business and Family Enterprise Ombudsman in 2021, seasonal fluctuations in sales and operations pose significant challenges for many Australian businesses, particularly for industries such as tourism, agriculture, and retail.
For businesses operating in these industry verticals, managing cash flow during off-peak seasons is critical for survival and growth. The survey highlighted that 72% of businesses reported cash flow issues during slower periods.
Therefore, effective cash flow management and budgeting allows businesses to prepare for seasonal fluctuations by ensuring they have sufficient funds to cover expenses during lean periods and capitalize on opportunities during peak seasons.
Meeting financial obligations:
A study conducted by Xero, a leading accounting software provider, revealed that late payments are a consistent problem for Australian businesses. Xero’s research found that on average, small businesses in Australia are paid 26.4 days late, resulting in significant cash flow constraints.
Timely payments are crucial for meeting financial obligations such as paying employees, suppliers, and lenders, as well as fulfilling tax obligations and regulatory requirements. Not to mention having enough working capital to seize growth opportunities as they make themselves available!
Precise and well thought out management of cash flow ensures that businesses meet obligations on time and avoid penalties, reputational damage and potential legal issues.
Funding growth and expansion:
The Australian Bureau of Statistics (ABS) reports that small businesses, i.e. businesses that make less than $25m in annual revenue and have less than 50 employees, account for approximately 98% of all businesses in Australia.
For these businesses, accessing capital for growth and expansion can be a significant challenge – particularly in the current economy. The ability to access growth capital has increased in difficulty over the last 12-18 months because of inflation, interest rises, global tension and so on.
Therefore, implementing a bullet proof system for managing your cash flow plays a vital role in generating excess funds that can be reinvested in operations and fueling sustainable growth.
According to a survey by the National Australia Bank (NAB), businesses that actively manage their cash flow are more likely to experience growth and profitability. The survey indicated that 62% of businesses that reported positive cash flow growth also experienced increased profits.
Managing supplier relationships:
Building and maintaining strong relationships with suppliers is a necessity to cement smooth operations. The Dun & Bradstreet Late Payments Study revealed that late payments are a major concern for suppliers, with Australian businesses paying their bills an average of 14.6 days beyond the due date. This is because late payments cause a snowball effect – a late payment to one business results in late payment to another, and so on.
Cash flow management enables businesses to honor their commitments to suppliers promptly, fostering trust, goodwill, and loyalty. This can lead to sincerely advantageous benefits such as extended credit periods, bulk discounts or preferential treatment during high-demand periods, ultimately improving a business’s competitiveness and profitability.
Cash flow forecasting:
Cash flow forecasting is a proactive approach that is recommended to all businesses – regardless of size. Forecasting helps businesses anticipate potential shortfalls or surpluses in cash flow over the upcoming 12-24 months based on the company’s experience in the previous 12-24 months. It’s important to note here that forecasting is not expected to be one hundred percent accurate.
The Westpac Cash Flow Report highlighted the importance of cash flow forecasting for Australian businesses. Westpac’s report found that businesses who forecasted their cash flow were 4.5 times more likely to have positive cash flow compared to those that did not take the time to execute forecasts. This is because they were better prepared and proactive instead of reactive.
Cash flow forecasts provide insights into upcoming financial obligations, allowing businesses to adjust their strategies accordingly and make informed decisions. This enables them to better allocate resources, manage expenses and optimize cash flow.
Mitigating financial risks:
The dynamic Australian business environment is fraught with uncertainties and unforeseen events which can significantly impact cash flow. Consider COVID19 as an example.
Precise cash flow management helps businesses mitigate potential financial risks by putting aside contingency funds, implementing invoice financing to reduce risk of late payments or exploring insurance options. Based on Westpac’s Cash Flow Report, businesses that actively managed their cash flow were 1.6 times more likely to have funds set aside for emergencies.
Adequate risk management practices, such as diversifying revenue streams, unlocking cash flow, setting aside emergency reserves and monitoring market trends can protect businesses from cash flow disruptions caused by economic downturns, natural disasters, supply chain disruptions or other unforeseen events.
In summary, research provides valuable insight into the importance of cash flow management for businesses in Australia. The evidence is clear: proactive and effective cash flow management enables businesses to navigate seasonal fluctuations, meet financial obligations, fuel growth and expansion, manage supplier relationships, and mitigate financial risks.
By implementing strategies such as cash flow forecasting, budgeting, invoice financing and risk management, Australian businesses can achieve financial stability, ensure long-term viability, and capitalize on opportunities in an ever-evolving market.
Embracing cash flow management as a core business practice will undoubtedly contribute to the success and resilience of businesses across Australia. To learn how OptiPay can support your cash flow goals, click here.
