Australian small business owners are dipping into their personal savings or increasing their prices to mitigate rising costs and make a profit, according to a new report from global small business platform Xero.

The report titled, Money Matters: navigating the impact of economic conditions on the cash flow of Australian small and medium-sized businesses, surveyed businesses on their perspectives and behaviours on cash flow management.

The report's findings indicate significant signs of financial stress for small businesses in Australia with over a quarter (27%) revealing they've had to use their personal savings to keep their business afloat. Additionally, one third (34%) of small business owners say they have been unable to pay themselves.

Late payments can have impacts on the entire supply chain and create a domino effect, making it difficult for businesses to pay their own bills on time (26%), which can contribute to cash flow stress. Many have also needed to negotiate payment terms with suppliers (42%) and experienced stalled revenue (40%).

"Cash flow is a major challenge for many small businesses," says Leigh ONeill, Executive General Manager, Money, Xero.. 

"Our research uncovers some troubling signs about how Australian small business owners are coping in the face of today's volatile and uncertain economy, and the sacrifices they are making to keep their businesses going and employees paid."

The report has also revealed 45 percent of small businesses admit they are worried about their personal financial future, and nearly half (48%) are concerned about their business's financial future. Only half (49%) feel on track to achieve their business financial goals, and 60 percent don't feel confident about their ability to absorb any financial shock.

An overwhelming 60 percent of businesses surveyed have experienced cash flow issues, with 14 percent experiencing significant challenges. Nearly a third (29%) of small businesses check their cash flow position daily.

Small businesses also called out inflation and its impact on cash flow as a major hurdle, with one in two (57%) saying it impacted their cash flow management over the past six months.

Tactics businesses use to avoid a cash flow crunch

Insights from the survey have shown that while some small business owners are using technology effectively, there are still plenty of opportunities to tap into the tools and resources available to better support their cash flow.

While the most common tools are setting reminders and scheduling payments (36%), setting up direct debits (36%), and eInvoicing (33%), only 38 percent of business owners are using accounting software to track cash flow. Construction and trade businesses embrace the least number of tech-savvy measures like cash flow forecasting tools.

For support during periods of tighter cash flow, small businesses are most likely to speak to an accountant or bookkeeper (24% and 18% respectively), while just under a quarter (24%) will focus on chasing overdue payments.

"Business owners must constantly monitor cash flow in order to manage it," says ONeill. 

"Planning and forecasting tools are a great way to identify cash shortages and consider all options, whether that's drawing down on a line of credit or increasing your prices. 

"Giving customers flexible payment options or automating payment processing can also ease cash flow pressures."

The flow on effects to financial and emotional wellbeing

Cash flow pressures are weighing on the hearts and minds of business owners. When asked about the emotional and physical impacts of cash flow management, business owners report feeling stress (57%), anxiety (50%) and having trouble sleeping (48%) over the last 12 months.

Previous research from Xero conducted between November 2022 to February 2023 found the overall wellbeing of Australian small business owners was below that of the general population and Australia had the second-lowest overall wellbeing of the seven countries surveyed.

The stress of managing cash flow is having a detrimental impact on small business owners, affecting their livelihoods and happiness," ONeill says. 

"Thats why its never been more important to plan, forecast, and have a strong contingency plan in place to weather the storm and to support their positive wellbeing."