Cash flow is the life blood of any business but history shows its management remains a massive ongoing challenge for business owners. In fact, according to research by the Australian Bureau of Statistics, half of all businesses cease in their first three years of trading and 40% of that is due to poor cash flow and cash flow management.
In a stark wake-up call for Australian businesses, the latest insolvency data from ASIC paints a grim picture of the corporate landscape.
With a staggering 36.2% increase to 7,742 companies entering external administration from 1 July 2023 to 31 March 2024, it’s clear that the aftershocks of the pandemic and the current economic climate are taking a heavy toll on businesses across the nation.
It’s important for business owners like you to stay informed about these trends and understand the implications they may have for your own enterprise. While external problems almost always generate cash flow issues, the main reasons for difficulties in the past year have been:
- Economic Uncertainty: After the global economic turbulence of the past few years, 2025 is seeing lingering uncertainties in domestic and international markets. Rising interest rates, inflationary pressures, and fluctuating consumer demand have left many businesses struggling to manage cash flow.
- Post-Pandemic Fallout: While government support during the COVID-19 pandemic provided temporary relief, the withdrawal of such measures has exposed underlying vulnerabilities in many businesses. Companies that relied heavily on subsidies are now finding it challenging to stay afloat.
- Increased Regulatory Scrutiny: In 2025, regulators have already introduced stricter compliance and reporting obligations for businesses, particularly in industries like construction and retail. This has placed additional pressure on businesses that are already financially strained.
- Supply Chain Disruptions: Ongoing global supply chain issues have continued to impact production costs and delivery schedules, affecting profitability and causing financial strain for businesses reliant on imported goods.
- Rising Operating Costs: With increases in wages, energy prices, and other operational expenses, many businesses are finding it difficult to maintain their margins.
Business owns need to focus on cash flow at all times and always treat it as a business asset rather than a small business owner’s personal one. You’ll often hear the expression, “Cash is King” but for most small businesses that’s the problem because it is also known as the “life blood” of a business. As such, its significance can’t by underestimated. It also explains why tens of thousands of businesses are under pressure chasing outstanding debts as well as being buried in a pile of unpaid bills.
The Small Business Ombudsman (Kate Carnell) says the number one problem facing small business owners is the impact late payments from customers have on cash flow. Large companies often treat small suppliers “with contempt” and delay payment of invoices. She singled out large supermarket chains and transport companies as examples.
Cash Flow vs Profit
From an accountant’s perspective, a lot of business owners don’t understand cash flow. While they understand the concept of profit, they struggle to understand why their purchase of plant and equipment (such as computers, machinery and vehicles) don’t appear on their profit and loss statement. Similarly, their loan repayments are also missing as are their tax payments to the ATO. There are other differences between your profit and loss statement and cash flow statement including depreciation and if you are a sole trader, your drawings. We are happy to explain all these variations with you because it is important that you understand your numbers.
Your cash flow forecast should include all funds that go in and out of your business and the purpose of the statement is to identify future cash flow shortages. It is a planning device that lets you predict when you might need to borrow money or extend the overdraft to deal with cash shortages.
So, What Can You Do to Improve Your Cash Flow?
There are plenty of free resources that aim to help small businesses manage their revenue and expenses, but sometimes spreadsheets and templates aren’t enough.
Firstly, understand the invoicing process including quoting and be crystal clear about the terms of your invoice. That might require having a legal document drawn up, so your customers understand your full terms and conditions including late payment penalties. Having your customers agree to your trading terms before you start working with them provides some degree of confidence regarding likely cash flow.
Next, examine your financial statements and understand the numbers beyond your profit and loss statement. Monitor where your money is being spent and see if you could cut some costs. Know your gross profit margin and monitor price hikes from suppliers and make sure you pass the extra costs onto your customers.
Do cash flow projections because in business, forewarned is forearmed.
Banks have an application process when lending money and it takes time. You can’t get a business loan in 24 hours so planning ahead is absolutely critical. We can provide you with a cash flow template if required and if cash flow is a concern, contact us today.
