Australian businesses are struggling with cash flow due to inflation and high interest rates

A September 2022 study, commissioned by Small Business Loans Australia, has recently unveiled the increased pressures that Australian small to medium enterprises (SMEs) are facing due to record high levels of inflation and rising interest rates.

The study specifically questioned the impacts on cash flow and investment plans for SMEs from now, up until the 2024 financial year.

During the study, 253 SME owners and senior decision makers were surveyed on their predictions about the effects inflation will have on their specific businesses. It was part of an effort to gain an understanding of the health of the wider Australian business community, in the face of recent challenges.

The study included a range of different sized businesses - majority of them micro businesses (68 percent) with one to 10 employees, and the rest comprising of 18 percent small businesses with 11-50 employees, and 14 percent of medium sized businesses with 51-200 employees.

Confirming concerns, a staggering 76 percent of SMEs answered that yes, their cash flow will be affected by the rise of inflation and interest rates, either through an increased difficulty in collecting customer payments or through a struggle to make sales.

Small Business Loans Australia founder, Alon Rajic, says the recent rate hikes are necessary, but painful to businesses.

"Australian SMEs are under pressure due to two main reasons. One being high inflation, and the second one being increasing borrowing interest rates, which are a result of the RBA's rate hikes. Rate hikes are meant to fight inflation but in the short term they actually put more pressure on consumers and SMEs alike," said Mr Rajic.

Businesses in Western Australia and New South Wales seem to be especially feeling the pinch, revealing a higher potential risk of cash flow issues due to a difficulty in collecting customer payments.

Of the WA participants, 81 percent reported that they predict issues maintaining their cash flow at a healthy level, due to combined factors. This could be due in part to the heightened levels of inflation that WA is experiencing, sitting above the national average on the consumer price index.

New South Wales businesses showed similar sentiment, with 82 percent predicting cash flow issues because of client payments and difficulty attracting sales, followed closely by Victoria (77 percent), South Australia (73 percent) and Queensland, sitting at 67 percent.

The study also looked at whether the current economic conditions are prompting SMEs to delay making business investment purchases, which has the potential to place further strain on Australia's economy.

Over half of the businesses surveyed revealed that they would delay or cancel altogether any planned business investments, with the majority of those (40 percent) choosing to revisit investments when the economic climate improves.

A mere 17 percent of SMEs answered with the confidence that they will go ahead with their planned investments into their businesses, including new technologies or the hiring of more employees.

It's a grim statistic when 56 percent of SMEs surveyed had indicated that they intended to spend (regardless of their new intentions) over $50,000 on business investments before July next year, confirming that the impacts of inflation are widespread, and potentially catastrophic.

"Inflation diminishes Australian SMEs' buying power while higher rates make it more expensive to borrow money and also make existing debt more expensive to repay.

"The overall poor global economic outlook also decreases the appetite that lenders and banks have to lend out money.

"So if a business is facing growing stocking, production, or labour costs and needs to borrow money to overcome that, they will also have more trouble finding a bank or a lender willing to put out that bridging finance, and they're also going to pay higher interest than they would have needed to pay in the past, leading to a potentially vicious cycle," said Mr Rajic.

With a fast-evolving situation unfolding in the global and Australian economy, preparation is key to the healthy cash-flow management of businesses.

An increase in business expenses, and more expensive debts, calls for adjusted business budgets and new strategies to be put in place. However, according to the study, only 57 percent of participants have implemented specific strategies to combat the new financial pressures.

"The smartest thing that businesses can do nowadays is to be in full control of their expenses," said Mr Rajic.

"The first step is to verify there are no unnecessary funds wasted on things that aren't crucial for operation. That doesn't mean businesses need to drop all growth aspirations or not spend any money on potential growth, but they must look at things through a more realistic prism than before. SMEs now must see a clear ROI or potential ROI at least for every dollar they spend out of pocket.

"The second step SMEs need to take is to ensure they are optimising their necessary expenses. That means shopping around and negotiating to get the best price, as well as finding more cost effective substitutions wherever possible," said Mr Rajic.

While the RBA focuses its attention on the cash rate in an attempt to get a handle on inflation, there is uncertainty around when we might start seeing an easing of the current cost of living pressures.

Cautionary optimism is likely the best approach individuals and businesses can take, erring on the cautionary side.

"As energy prices are declining, it is possible inflation will curb down at the beginning of 2023.

"As inflation decreases, it's likely central banks across the globe will stop their rate hikes as well, and if inflation falls into the 2% range, it's likely central banks will start cutting rates back, and that a long recession will be avoided.

"It's not likely, but certainly possible, that in 2023, the global economic outlook will look as good as it did in 2021," said Mr Rajic.

Advice Disclaimer

This article is intended to provide general information only, and not financial advice. Before acting on any information in this article, you should consider your individual and business circumstances, and seek independent and professional legal, financial, taxation or other advice to help you determine whether these actions are appropriate for your needs.

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