The report Crunch: cash flow challenges facing small businesses, prepared by Accenture, with the support of Xero, analysed comprehensive inflow and outflow data from thousands of UK small businesses to understand the extent of their experience of cash flow stress.
It found that the average UK small business faces cash flow crunches – where monthly expenses exceed revenues – for more than four months each year, with almost one in four (23 per cent) experiencing it for more than six months each year. Worryingly, 94 percent of UK small businesses suffered at least one month of negative cash flow in 2021.
Small hospitality businesses felt the brunt of the initial COVID-19 impact the most and the proportion of small firms that were cash flow negative in this sector peaked at 54 per cent in July 2020.
Professional service businesses fared relatively well both before and during the pandemic. They consistently saw one of the lowest amount of businesses experiencing negative cash flow in 2019 (38 per cent), and this remained relatively unchanged throughout 2020 and 2021.
Rachael Powell, chief customer officer, Xero, said the latest report reveals just how persistent and systemic cash flow challenges are for small businesses on a global scale.
“Healthy cash flow is essential to a thriving business, yet our research shows that the vast majority of small businesses are having cash flow issues at least once a year,” she said.
More than 90 per cent of small businesses in Australia, New Zealand and the UK experienced at least one cash flow crunch each year. Many are suffering for several months each year: on average, small businesses are cash flow negative for 4.2 months in Australia, 4.0 months in New Zealand and 4.5 months in the UK.
For some small businesses, cash flow crunches occur more regularly. In the UK, nearly a quarter (23 per cent) of small businesses experienced more than six months of negative cash flow in 2021.
“These figures highlight that good cash flow management is more easily said than done. For many of these businesses that regularly experience cash flow crunches, prompt invoice payments and more support in budget planning could unlock huge growth opportunities,” said Ms Powell.
Xero’s EMEA managing director, Alex von Schirmeister, said the report reconfirms that small businesses are facing tough cash flow challenges and that the government needs to step up to address the UK’s late payments issue.
“Given the steady post-pandemic resurgence in cash flow issues that we’re seeing in the UK, we urge the government to help,” he said.
Ensuring customers pay on time is the most crucial step towards improving cash flow. According to another Xero study, 55 per cent of large organisations admitted to paying their small business suppliers later than the agreed payment terms in the last 12 months. This is despite 78 per cent of respondents claiming they are aware of the impact this could have on the suppliers’ business.
The same study also found that more than four in five (81 per cent) large businesses would be more likely to pay their suppliers on time if late payments were renamed as “unapproved debt”. This was a recommendation put forward to the government as part of Xero’s UK-wide late payments task force*, established in September last year.
Mr Von Schirmeister said there is evidence of big businesses purposely withholding cash from their small customers.
“We must move away from calling it ‘late payments’ which legitimises poor practice and lacks urgency. It’s time we labelled this ‘unapproved debt’,” he said.
“There must be appropriate incentives for large businesses to pay their suppliers on time, and stricter penalties when it comes to paying late to prevent further cash flow instability. Larger companies have been let off the hook for too long. Just imagine how economically productive our small business economy could be without the toil and stress of chasing payments.”
