Small businesses are somewhat the lifeblood of the economy. There are many small businesses worldwide. Well, actually, small business represents 99% of businesses worldwide. No matter the relative size of the small business, one big issue that plagues them is cash flow problems.
From not having enough to poor management, the cash flow is one of the most cited challenges for small businesses. Without proper cash flow management, the operations will suffer greatly. That is why this article is your all-in-one guide for everything cash flow.
We analyzed crucial 18 cash flow statistics 2022 about small businesses and cash flow. If you own a small business, these are something you cannot afford to overlook! But before that, let’s see why even bother paying attention to cash flow.
Why Paying Attention to Cash Flow Is Important
No matter what kind of business you own, or what size it is, cash is hands down one of the most important things. It simply keeps the show running. From big businesses to small businesses, paying attention to cash flow is super important.
This is even more true when it comes to small businesses. In fact, most of the businesses out there are small. This guide will tell you all the important cash flow statistics you need to know to be ahead in your business.
It does not matter what industry you are in, or which phase of business you are operating. With the right information, you will be able to make more informed business decisions. And besides, knowing the in and out of your business’s cash flow will keep it financially healthy as well.
Let’s check out some of the terms that you should know when you are running a business.
Cash Flow Helps You Tackle Uncertainties
Business is an uncertain game. Different challenges can appear from anywhere. The market might change. While knowledgeable business owners can sometimes predict drastic market changes, having proper cash flow management will help you prepare in the case when something unexpected comes up.
And let’s be honest, something unexpected can come up anytime. That is just one of the risks of doing business.
Well Managed Cash Flow Equals to a Healthier Business
When you have mastered the art of managing cash flow for your business, you will be set to having a much healthier business in general. Your business will be much more financially stable. SMEs need to start by analyzing their cash flow.
Recording Cash Flow Gives Insight
When you record a cash flow, you gain valuable insights on a lot of important things. Things like where the money is coming from, where the money is being spent. It basically tells you how your business has earned or spent money through all its operational, investment and financing activities throughout a certain time.
The cash flow statement should be divided into segments or quarters. You can do one weekly, or monthly and an annual one as well. If you want to be really serious about it, doing all three can work as well.
Having this data over a couple of quarters will give you a much clearer picture of how your business is operating. Where the revenue is being invested, how much money everything is costing you, and more importantly, how much you are earning through your sales.
It will also help you maintain enough cash to meet your obligations. Like payroll, loan payments, and also payments made to vendors and likes.
18 Cashflow Statistics and SME Facts You Should Know
Let’s start with some crucial statistics about small business cash flow. A lot of smart people and business magnates have researched and studied how cash flow impacts a business’ operations. There are a ton of small businesses in the US.
30.2 million small businesses. This small business, where there are fewer than 500 employees, accounts for 47.5% of the country’s workforce.
1. SMEs Live and Die by Their Cash Flow
You have probably heard the term SME. It means small and medium enterprise. Like it or not, SMEs practically live and die by their cash flow. To be more specific, their operating cash flow. Large companies have a very crucial safety net. Their cash.
For SMEs, there is a lot of volatility and obscurity that they need to face. When you have paid for the services/product you offer, you essentially run on your cash flow. If that is not there, there is no ‘fuel’ to run the business on.
That is why we say that SMEs really do live and die by their cash flow. About 60% of SMEs fail due to cash flow problems. So, it is not something you can just ignore.
2. Small Businesses Say Cash Flow Is One of Their Main Concerns
If you find yourself often worried about cash flow and how you will handle all that, you are not alone. Small businesses, regardless of the relative size, say that cash flow is one of their top 5 challenges.
This means that everyone really is feeling the pressure here. And it makes sense given how important cash flow can be for a small business.
3. SME Liquidity Need Increased a Lot
In the US, 37% of small businesses said that their need for better liquidity has increased quite significantly. That can be because of a lot of different things.
It can be either for poor cash management, cash being tied up, or just not having cash flow in general. On the other hand, 34% said that the liquidity needs to increase by a bit. So, businesses can be found on either side of the coin.
4. Most SMEs Can Cover Only 27 Days of Expenses
Currently, most SMEs do not have much cash. That is not news. However, there are more specifics about this.
Small businesses, in general, have the cash to pay for only 27 days of expenses and day-to-day operational costs. Not the best position to be in.
5. Healthy Cash Flow Would Be Mostly Used for Inventory Purchase
You cannot do business if you do not have anything to sell. So, it is no surprise that 33% of the businesses said that they would use cash flow to buy inventory or equipment.
Equipment is also necessary for keeping processes running. This is especially true for manufacturers.
6. Expanding Operations
Not all businesses have the same action plan. Some want to use cash flow to grow and expand their operations. It can be to new markets and opening new locations in other places.
28% of small businesses said that they would use cash flow to expand. And it also includes exporting to new markets.
7. Invest In Employees
You could argue that a company’s employees are its biggest assets. So, it is no surprise that some businesses want to have the cash flow for investing in their passionate workforce.
This investing can take many forms. It could be hiring new employees, giving further training to existing ones or even for wages and employee benefits.
8. Contingency Planning
As we said already, business is a game of uncertainty. You do not know for sure what will happen and how things will play out. The best you can do is be informed, have insight into the market, and prepare for uncertain events.
That is why 4% of small businesses said that they would use the cash flow for contingency plans for such events.
9. SMEs Get More Loan Approvals
Here is some good news. In general SMEs have a higher rate of loan approval from banks. The percentage here is dependent on the revenue your businesses generate. Businesses that have a revenue of less than $100K have a 60% approval rate.
For businesses with more than $100K – 1M, the approval rate for loans is 69$. It is an 88% approval rate for businesses with revenue of over $1M – 10M and a 96% approval rate for businesses with over $10M revenue.
10. Late Payments Still Remain a Big Problem
When you are a small business, not getting paid on time can be very detrimental. That is why 24% of SMEs say that their customers are late on their payments. This can starve the business out of cash.
If you do not get paid, you do not have money to run your business, pay for operational expenses, and more. Worldwide, 28% of small businesses struggle with late customer payments.
11. Late Payments Are Sometimes Just Written off As Debts
Getting paid late is bad enough. Now, imagine that being written off as debt. Yes, that can be very painful for small businesses. And that happens.
10% of late payments are written off as bad debts. That means this money will not be recovered.
12. SMEs Are Spending Days Chasing Late Payments
Chasing your customers for timely payments is nothing new. But some businesses are spending double-digit days on it.
Nearly 15 days in a year are spent on late invoices and payments. While it may not sound like all that bad, it can impact the operation of a business. And there is always the chance of the late payment being written off as bad debt as well.
13. Understanding Credit Reports Is a Big Issue
If you are a business owner, awareness and understanding the financial aspects of your business are very important. It might be a shock to you, but 82% of businesses do not understand their credit reports fully.
That number is way higher than it should be. When you understand your credit report, you will be able to make much better decisions.
14. Errors and Missing Data Is Not New in Credit Reports
Speaking of credit reports, the frequency of which businesses find mistakes and data just outright missing is also quite high.
Almost 25% of small businesses say that there were errors or missing data in their reports. Fixing them is not easy either. 23% of them said that fixing all the mistakes is quite tough.
15. Not All Businesses Even Consider Themselves Particularly Knowledgeable
Another surprising statistic is that not all businesses are confident in their knowledge when it comes to finances and accounting.
Only 39% of small businesses even consider themselves somewhat well knowledgeable on the matter. If you are starting a business, or already running one, make sure to have a good grasp on the financials and accounting.
16. SMEs Trust Their Accountants
This statistic may very well just be a direct effect of the previous one. SMEs trust their accountants quite a lot. And we are not saying that they should not. An accountant working for a company will, in most cases, have the best interest of the business in mind.
SMEs say that their accounts are their most trusted advisors. A growing number of advisory accountants’ roles become more strategic. 70% of SME accountants have had that shift.
17. Awareness Is an Issue
Being in the dark regarding anything about your business is a big no-no. And that is even more true if that thing is your business’ credit score and cash flow.
45% of SMEs do not seem to know their credit card score. One of the ways you can have better cash flow management is knowing everything related to it.
18. The More Cash Flow Reviews, The Better It Is
Here is another interesting one. Businesses that review their cash flow often, have a higher survival rate.
Those who do it every month have a survival rate of 80%. And businesses that monitor it only once a year, have a survival rate of a measly 36%.
Getting Familiar with The Process of Maintaining Cash Flow
Before we jump into the juicy stats, here are some of the terms and formulas you need to know about cash flow.
These formulas and definitions will give you a better idea of what kind of cash flow there is, what they mean, and how to calculate them.
Free Cash Flow
Free cash flow is the cash that makes or generates after operating cash, dividends (if any), capital expenditure, changes in working capital are all accounted for. In simple terms, this is the money your business has leftover that it can do something with.
As you can guess, knowing this figure is important. Since it paints a very clear picture of how much liquidity your business has. When you have free cash, you can have the cash work for you. From basic economics, we know inflation and the time value of money is a thing. What that means, is a particular amount of cash is worth less than say a couple of years ago.
Knowing how much you have will help you make business decisions that will not cripple your cash flow. You can be much more methodical with your approach. The simple formula for calculating free cash flow is:
Free Cash Flow = Operating Cash Flow – Dividends – Capital Expenditure – Working Capital
Speaking of making your money work for you, having a cash budget will tell you right away just how much you can spend. There is one very important thing to note here. The main reason for creating a budget is not to set a target or goal to reach.
It is for anticipating any kind of monetary needs of the business. Setting up a budget will help you predict general outcomes. And not to mention that it also tells you pretty clearly how much cash you have at hand.
If you have not started doing a cash budget, then do not worry. You can just get started from now on. You can create budgets for 6 – 12 months.
Another particularly important reason why you need to pay attention to your business’s cash flow is so that you can perform accurate ratio analysis. It helps you determine just how liquid your business is.
In other words, it tells you how capable the business is of meeting the short-term debts. There are two important ratios you need to be mindful of. The current ratio and quick ratio. The current ratio is simply the ratio of your assets to your liabilities.
These assets include cash, accounts receivables, inventory. While the liabilities or debt are the account payables and all the bills you owe that need to be paid off within 3 months. So, basically 90 days.
Business Sectors with Good Cash Flow
This might seem familiar to you. You have a business and so do some of your friends. Only the difference is it seems like the other businesses are practically able to print all the money they want.
While your business sort of suffers. Or just has very tight cash flow. Here is the interesting bit: some businesses just have better cash flow depending on what kind of business they are. Here are some businesses that generally do well when it comes to cash flow:
Among one the businesses that do very well with cash flow are franchises. Popular and well-recognized names are at the top of the list. The thing about it, when you are opening a franchise, chances are you will be working with an already established brand.
And more importantly, with a franchise, everything is tested and proven to work. There is a playbook that you will need to follow. And that recognized brand name plus all the operational efficiency are perfected. Since cash flow does not suffer all that much.
Customers will come since they know the brand to be a well-known one. Fast food is the first thing that comes to mind for most people when people talk about franchises. But there are other franchises you choose to work with like fitness. The only downside is of course the initial investment will be pretty high.
Health Care and Social Assistance
Then you have the health care and social assistance sector. Sectors like senior homes, nursery homes, and also rehabilitation centers also do pretty well when it comes to cash flow. The demand is pretty high.
Especially nowadays when so many people are looking for care facilities and nursing homes. In most cases, the demand is higher than the supply. And that is one of the reasons why cash flow does not suffer much. Privately owned businesses in this field are the most benefited.
SaaS stands for software as a service. These services are offered through the internet. If you want to get fancy about it, they are offered via the cloud. These web apps are not costly to maintain.
The infrastructure is mostly technical and the raw materials are not needed as much. You would of course need things like talent, technologies, equipment, and things like that. Newer SaaS companies can reap the benefits of already established cloud infrastructure as well.
By the end of 2017, a whopping 94% of businesses were using SaaS applications. That is quite healthy for an industry if you ask me.
Real Estate Rental, Leasing, and Home-Based Businesses
The thing about this sector, especially leasing, is that you need to have initial cash to purchase a property. Once that is done, you can lease it. This will create a constant flow of cash. That is why private real estate rental and leasing companies have pretty good cash flow overall.
Other sectors that have good cash flows are:
● Niche restaurants
● Finance and insurance
● Retainer based industries like advertising agencies
Funding For Small Businesses
Small businesses need funding to grow. Investors are willing to invest if they deem it as an investment that will give them a good return. That is investing 101. But cash flow can be one of the reasons why a small business might get turned down for funding.
It is generally a bit difficult for small businesses to get funding. That might be funding from capital investors or banks. There are some hard numbers for this as well. 38% of the businesses that have a revenue of $5 million are given funding. So, if your current revenue is less than $5 million, it can be tricky for funding.
Not only that, if your revenue is over $5 million, you still are more likely to get funding. In fact, 70% of businesses that have revenues between $5 – 100 million are approved for funding. Not being able to fund your business is one of the biggest challenges.
Since you need proper cash flow, not being able to secure that will hamper the growth. And in severe cases, it can become quite problematic when it comes to just operating your business in general.
Reasons Why SMEs Might Be Turned Down for Funding
Small businesses are often turned down for funding for a variety of reasons. However, the overwhelmingly common reason is cash flow and or poor earnings. If you need some hard numbers, well, 25% of businesses are turned down for funding due to poor earnings or cash flow-related issues.
That is an important number to pay attention to. That is because even if you say that you have the best business model and made an awesome marketing campaign around your products, if your cash flow is not what it is supposed to be, funding will be difficult to get.
There are other reasons why a small business might not get funding too! 19% of businesses have been turned down just simply for the fact that they are new on the scene. They lacked enough operational history to give investors an idea of how they will fare. 21% of the businesses were turned down for their size as well.
Solving Some Common Cash Flow Problems for Small Businesses
If you run a small business, maintaining proper cash flow is crucial. There is some good news though. There are many well-known practices you can do to improve the overall cash flow of your business. Some are more short-term strategies while others are more long-term.
Proper inventory management is crucial. This can be a long-term strategy that you can incorporate. What you need to keep in mind here is not to have lots of cash stuck in inventory. If you know your sales numbers or turnover rate, you can buy inventory accordingly.
That way you will not have inventory just sitting around. And that will ease up some of the cash flow restraints. This tactic will not help improve your cash flow but will also plant good operational practices.
Good inventory management makes a business much more agile. But you need to understand that this can be a double-edged sword as well. If you stock too little then you might not have enough inventory when demand is high.
When you are buying products to sell from suppliers, buying in bulk also most often will get you a discount. You do not want to miss out on that. There is a fine line between stocking way too much and too little. Striking the balance here is crucial.
Your account receivables are some that will also help you pump more cash into the business. Account receivables are all the accounts that owe you money, basically. If you collect your receivables quicker that will leave you with more cash at hand.
When you make a sale, and if it is done on debt, negotiating a payment date from your customers is important in this case. You can offer discounts for early payments. This will entice your receivables to pay up earlier.
You can do the opposite thing regarding your accounts payable. Accounts payable are all accounts that you owe money to. So, the opposite of accounts receivable. Negotiating favourable terms is important here as well.
The idea is to pay when the payment date arrives and not before that. That way you will have money at hand for your business and you can use that. There is a word of caution here though. Negotiating the terms is important here.
Your suppliers also need to have cash at hand just as you do. So, make sure you also look out for their interest. There is no point in paying your dues way late only to have your supplier relationships spoiled. Again, balancing it here is important too.
At the end of it all, the best thing you can do about managing your business’ cash flow properly is to be informed. There is no other way of going about it. When you know how your cash is leaving and entering the business, you can make more informed management decisions.
Using Electronic Payments
This is another long-term thing you can incorporate to help cash flow. It sorts of circles back to my accounts payable point. Electronic payments can have cashback and other cool incentives. And more importantly, making payments on the day they are due is much easier.
Some business credit cards also offer a grace period of 21 days. Not all cards offer this. So, you need to do some research here.
Negotiate Better Deals
Frankly, by negotiating better deals, we are not saying to pay your suppliers less. If the relationship between you and the supplier is good, chances are you can get some extra perks. Those can be longer payment timelines and more importantly, less price.
You will be able to make a better deal when it comes to payment and prices with them. Long-term suppliers that you work with all the time should be more than happy to give you a deal if you maintain good professional relationships.
Business is not all about just crunching numbers, buying, and selling. There is also the human element of it. All businesses are run by humans and relationships matter in the business world. Try to create a win-win scenario with your suppliers. That will put you on their good side.
High Interest Saving Accounts
Lastly, there are always high-interest savings accounts you can use. A high yield savings account can sometimes offer 25x higher returns than the national average. This can mean some serious cash for your business.
You can enjoy having good liquidity while also being in a stronger cash position. So, check into which saving accounts give you the best returns. It is worth it.
Businesses end up paying high-interest rates when the profitability of the business is low. It causes lenders to have low confidence which ultimately leads to the business’s valuation being affected. And as a result, business owners pay higher interest rates.
A strong balance sheet and profit and loss statement is needed to show confidence. This is required if a small business wants to get access to funds. The health of the balance sheet is what the lenders look at when deciding to fund the business or not (and also the interest rate to charge).
Cash flow forecasts will come in handy too. It tells you when a business will be able to repay back its debts and loans. The worrying part is most small business owners do not have this forecast readily available. They only prepare cash flow forecasts when they have to submit them to the bank for funding.
Many entrepreneurs tend to apply for bank loans at the very last minute. This is when the cash outflows are getting consistently more than cash inflows.
Then all this hurrying and panicking can cause them to get confused and to include non-cash items like depreciation in the cash flow forecast. A business’s ability to pay its lenders without hampering the daily operation is a key metric.
When cash flows into and outside the business become unsustainable, owners reach for bank loans. Usually, entrepreneurs go for bank loans to invest in CAPEX. Capex will take a huge amount of cash from the existing cash balance. And sometimes it even empties the bank account.
Like depreciation, in cash flow, it doesn’t also include amortization. You should always benchmark your previous records when it comes to repaying loans. That is how you keep yourself grounded and truly know your business’ ability.
Extract transactions that show inflows and outflows and you can use it as a simple straightforward template. You also need to keep an eye on how fast you are growing. Not only that but also how the rate compared to the industry average.
There you have it. Told you some of the cash flow statistics 2022 are going to be pretty nerve-racking. But there is nothing to worry about. Knowing about your cash flow is half the battle already. You need to be aware of how cash is entering and exiting your businesses. And there are tons of things you can do to have a healthy cash flow.
If you are unsure about your current cash flow situation and want to find out cash flow health, this cash flow quiz will help you raise your cash flow self-awareness. The Cashflow quiz will help you identify the causes of cash flow problems in your small business and ways you can improve cash flow.
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[QUIZ] How healthy is your cash flow? Take the quiz and find out in less than 60 seconds.