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Cash Flow - the god of small business

The release by XERO last week of its research into what small business did with their tax cuts has highlighted a deep lack of understanding by many commentators of how important cash flow is to a small business person. Poor cash flow management is the major cause of small business failure. Good management of cashflow is vital, it is the lifeblood that keeps a small business alive. The difference between small, medium and large business is based on cash flow as much as resource management.

The tax cuts, announced by the government some two years ago, were for incorporated businesses with a turnover of less than $2m. The facts presented in the XERO report showed that the businesses that received the tax break used the extra funds in various ways:

  • 27% used it to lift investment, purchase equipment or improve stock levels

  • 19% used the tax break to increase hours of employees or hire new employees

  • 3% used it to increase wages, we can ignore this figure as a glitch

  • 51% used it to manage cash flow, they put it in the bank.

The most surprising result was that it was only 51% of small business people who put the money in the bank. The fact that almost 50% used the extra cash for staff or investment shows that a lot of businesses are confident of the future and able to plan for growth. But, some commentators became incredibly confused and believed that the money that went into the bank was actually ‘pocketed’ by the business owner.

Back to cash flow. Simply put a business must have enough cash in the bank to pay its debts. A business can be successful and solvent but due to circumstance, late payment of invoices being a major issue, they cannot meet their financial obligations. Depending on the business these obligations include, roughly in order of importance, payment of: wages, rent, suppliers, superannuation, servicing loans, GST and PAYE, annual licenses and fees, power, themselves and ancillary costs.

So, moving excess cash into the bank is not a rort, it is sensible professional small business business behaviour. It shows that the tax cuts were well used. The tax cuts kept businesses open in half the cases and helped business grow in the other half.

The other finding, which was a surprise, was that some 32% of businesses were not aware of the tax cut. We have always said that for companies that turnover less than $2m that the tax cut was not important but it seems for most small business it is an important issue, particularly for those close to the $2m mark.

Finally, there was also a great hue and cry because only 3% was used to increase wages. That is such a small amount that it is probably a glitch. These small business owners often pay staff above award already and often more than they pay themselves.

Simply put anyone who questions why wages didn’t go up or why half the money went to a bank account do not understand the difference between big and small business. Those few journalists, politicians and economic commentators who said that small businesses ‘pocketed’ the money need to admit they either have microphobia or they have no idea about business.

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