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SME Cashflow Problems Are Bigger than You Think

Recently the general lack of cashflow within SMEs in Australia was investigated by Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman, ASBFEO. She found that, contrary to what many might believe, the actual reason why small businesses are experiencing cashflow problems is due to slow payers, and those payers just happen to be large enterprises that should have the ability to pay timely. Among the slowest payers are large corporations and government and as a result, Ms Carnell is making efforts to rectify this situation.

Some Key Findings in the ASBFEO Inquiry

What the Ombudsman found was that at least 9 out of every 10 small business failures are actually due to problems with cashflow. As if that weren’t bad enough, she found that more than one-quarter of those had been forced to take out a small business loan to stay solvent. The money acquired from these loans paid wages, suppliers and for the day to day operations of the business. Now consider the fact that on top of paying that money back when invoices were collected on, interest on the loan was to be paid as well. This resulted in a loss for those SMEs and was one of the main reasons for shutting them down. Her efforts, then, became focused on what the government in Australia could do to get those debts paid timely.

Unpaid Debt Is Greater than You Think for More Reasons than One!

As an aside, while it is imperative to keep small businesses in Australia afloat, unpaid debt is much farther-reaching than you might imagine. One of the key indicators in how well an economy is doing is the value of the currency. With so much unpaid debt and businesses folding by the droves, an economy becomes weaker with each failure. As the economy gets weaker, the currency also declines in value and a devalued AUD, then, also affects Forex traders. Now you have a cycle brewing that doesn’t bode well for Australia. Small businesses close down, workers lose jobs, and there is a lack of confidence in the economy which, in turn, weakens the value of the Australian Dollar even further. It’s cyclic.

Carnell Seeking Ways to Combat Poor Payers

As a result of her inquiry into how and why larger enterprises are slow to pay, Ms Carnell is making an effort to set in motion government transparency in terms of what is really happening. She says that part of the outcome will enable small businesses to have a bigger hand in setting their own conditions for payment, but that alone doesn’t go far enough. She wants to bring to light exactly what the current conditions are and perhaps the ‘shame’ of their slow payments will prompt those larger companies to finally pay on time. Paying slowly results in more than just the closure of a small business that relies on prompt payment, it affects the entire economy in somewhat of a snowball effect as described above.

What SMEs Can Do to Reduce the Risk of Bad Debt

While the government is making an effort to bring the matter to the public eye, SMEs can do something as well. There are organisations available that offer advice to small businesses on how to reduce their exposure to bad debt. SMEs can also access credit risk information via credit bureaus to determine whether a business is a slow or non-payer, before providing credit. Ms Carnell says that, in effect, small businesses are being used like banks by larger businesses and no one thinks this is fair. They are being taken advantage of and now it’s time for SMEs to become proactive in handling debtors.

The entire economy is actually weakened by the sheer number of SME failures, and if it is the result of poor payment practices of larger enterprises, government has every right to step into the picture. It is bad enough to cause an SME to fold but it is worse yet when the very economy and value of the USD are called into account because they are taking unfair advantage of smaller and weaker companies. Perhaps Ms Carnell will be the David who defeats Australia’s Goliath. In the meantime, SMEs are advised to seek advice on how to avoid bad debt. In the end, it pays.


About the Author

Marcus Turner Jones graduated in Economics from the University of Sheffield before pursuing a career as a Market Analyst in London. He has his own website, Turner Jones Finance, and writes freelance from Buenos Aires with his dog, Luna.