Small business headed for cash crisis

Almost three quarters of businesses plan on seeking a short term injection of capital if they get into financial difficulty, and think their bank would be accommodating, a new survey from CPA Australia shows.

Almost three quarters of businesses plan on seeking a short term injection of capital if they get into financial difficulty, and think their bank would be accommodating, a new survey from CPA Australia shows.

But they could be in for a nasty shock. The credit crisis means their bank is likely to be less agreeable, which may have serious implications for the business. CPA Australia’s business policy adviser, Gavan Ord, says many businesses will need to unlock reserves of hidden cash to improve cash flow rather than rely on external sources of finance.

The latest CPA Small Business survey of 500 small businesses with less than 20 staff, found that 41% of businesses never prepare a cash flow forecast and 25% never chased up late payments. Almost 70% of businesses surveyed do not even prepare quarterly financial statements.

“This is a recipe for disaster,” Ord says. “Keeping books up-to-date, preparing budgets, including cash flow forecasts and comparing actual results against budgeted results, are essential… and puts businesses in a far better position to manage their cash flow resources and profitability.”

The survey also found that 36% of those surveyed had to borrow in the past year for business survival, with banks being the most common lender. Surprisingly, 39% of small businesses that have borrowed funds do not know the interest rate on those borrowings.

Even more surprising, given the downturn, 66% of those surveyed expected their businesses to grow in the next few years. Ord says the high levels of confidence could be attributed to the economic prosperity of the past decade.

“Many small business owners wouldn’t have experienced an economic downturn, having run businesses only though the buoyant conditions of the past decade, and so may be relatively unprepared.”

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