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Supporting SMEs Q4 2023

Navigating the cash flow crisis

iStock / Getty Images Plus / nortonrsx

Jo Copestake

UK Sales Director, Xero

Small business owners are being kept awake by cash flow worries. Adopting digital tools can give them better insights into their finances to plan ahead for the future.

The last twelve months have presented several economic challenges for small businesses. From high inflation, supply chain shortages and slow demand growth all weighing heavily on owners’ minds. In fact, Xero’s ‘Money Matters’ study revealed that half of owners worry about their financial future, with nearly three-quarters (72%) admitting they’ve had cash flow issues in the last 12 months. 

Beyond the financial impact of having poor cash flow – with 41% of owners sacrificing their own salaries, and 34% using personal funds to keep their business afloat – there is also the impact on owners’ personal lives to consider. For instance, 82% of owners are affected by stress, 80% by anxiety, and 60% have trouble sleeping. It is no surprise therefore that managing cash flow has become a top priority for small businessess. 

So, what can you do to help manage this challenge in your small business? 

Stay on top of late payments 

Late payments, or ‘unapproved debt’, as Xero prefers to call it, can be incredibly harmful to small businesses and their cash flow. Unfortunately, it is something happening all too often, with small businesses waiting the longest time in three years for late payments according to Xero’s Small Business Index. Not only does it affect cash flow, sometimes preventing businesses from paying their staff, it also distracts owners from being able to focus on growth, as more time is spent chasing payments. 

However, despite the burden of chasing payments, few small businesses currently use accounting software to track their incoming finances. Sanjay Aggarwal, co-founder of small business the Spice Kitchen admits, “At first, I saw it as a huge cost to get support with my accounts, but once I got over that, it freed me up to focus on growing the business.” 

By using apps such as Chaser that integrate with your accounting software, small businesses can automate the process of managing their invoices. Software takes the strain away by setting reminders of when payments are due, chasing customers for payments and generating invoices automatically. 

Developing financial plans can help businesses
prepare for slower periods during the year.

Plan ahead for success 

Developing financial plans can help businesses prepare for slower periods during the year. For instance, the majority of owners have raised their prices in the last year, while a third of them have reduced overheads and lowered marketing spend to overcome cash flow constraints in response to economic conditions. Just 8% however, are using cash flow forecasting tools to help them plan ahead. 

These tools can help protect businesses from poor cash flow, and can help owners react to real-time changes in their financial position and forecast their future sales and expenses to create an accurate budget. For example, if actual revenue was not as high as had been forecast in one month, the plan can be adapted alongside your accountant or bookkeeper to ensure you remain profitable in the future. 

Don’t be put off by software 

Many small business owners put their inertia around digital tools to a perceived lack of relevance, while a quarter prefer to manage payments using traditional methods (26%) or don’t think enough of their customers use digital payment methods to make adoption worthwhile. 

Yet as Aggarwal points out, “One of the turning points was acknowledging that the way we were doing our accounting was inefficient and wasn’t really proper accounting.” Aggarwal adds, “Now all our sales channels like Shopify and Amazon are integrated with Xero, providing real-time insights into our transactions. This has helped us to streamline the accounting process and provide deeper insights into how we operate.” 

By embracing digital tools as your ally, you can set up your small business for success to navigate the toughest times, and put yourself in the best position to expand and grow. 

Xero provides cloud-based accounting software for small businesses. For more information on how digital tools can help you better manage cash flow, visit the Xero cash flow hub here.

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