Cashflow is the process of collecting, disbursing and accumulating cash. It can be positive – meaning you have enough cash to pay your costs as they fall due, with some left over. On the other hand, it could be negative, meaning you have more cash flowing out of your business than coming in. This means you’ll have to either borrow money or invest more of your own money into the business to pay your costs.
The statistics on business success are scary. Only around 50% of businesses survive beyond five years. The number one reason for business failure is poor cashflow. The sad thing is, a lot of these businesses that fail due to poor cashflow were actually making a profit.
Xero publishes their Small Business Insights report each month. These reports show that in 2021, only 53% of SMEs in Australia were cashflow positive. That means just under half of SMEs were cashflow negative, meaning more cash went out of the business than came in.
Another key statistic was that invoices were paid in 32 days on average. Think about what that means for your business. You need to pay all of your expenses while waiting for your customers to pay. Imagine the difference if your customers not only paid on time, but you changed your payment terms so you were being paid in 7-15 days instead.
These statistics might have given you a bit of a reality check. In the coming weeks, we’ll look at what you can do in your business to make sure you’re cashflow positive and don’t become part of the statistics and fail due to poor cashflow.