The struggle of Australia

Small Business with cash

flow management and

understanding financial

statements

Dr Brett Freudenberg

Professor - Taxation

Melissa Belle Isle

Lecturer - Taxation

• Small business cash can be subjected to variations as a result of

markets, in particular seasonal trends.

• Small businesses do not tend to store cash in peak periods in

order to survive times of contraction.

• Cash is generally tied up in goods produced or stock held or has

not been collected from debtors within trading terms.

• Small Business Owner (SBO) need to understand the

importance of cash flow for ongoing survival and employ

necessary systems to manage it.

Cash Flow

• SBOs are not actively involved in systematic cash flow management practices (Belle Isle and Freudenberg 2015, Peel, Wilson & Howorth, 2000).

• SBOs who solely manage their own cash flow without the necessary competencies to do so have minimal or no cash reserves

• SB need more assistance with cash flow than any other area of non-tax related advice. SBOs also need guidance with financial management, record keeping, business planning and staff-related advice (ATO, 2018)

• Management of cash flow in small businesses is a spontaneous activity rather than one that is well planned (Sucuahi & Agyei-Menash, 2013)

• To what extent do advisers (especially tax agents) assist SBOs beyond compliance activities?

Cash flow management

• Small businesses in Australia and overseas make limited use of

financial statements to assist them in managing their business

• Preparation and use of financial statements can assist business owners

to make more informed decisions and facilitates improved performance

• Use of financial statements for small business is to provide up to date

cash flow information.

• Limited use in Australia to be a result of owners’ lack of understanding

of how to analyse the figures within the statements and their reluctance

to seek help to do so from their accountant (Halabi, Barrett & Dyt, 2010)

Understanding Financial Statements

• Engage experts and SBO to determine an effective cash flow

management system and literacy required for cash flow

management.

• SBO Interviews n = 17

• Expert Interviews n = 23

• SBO Survey n = 128

Research project

Expert Interviews – Base Level of Literacy

✓ Record revenue and expenses

✓ Understand the effect of aged payables and receivables on cash flow

✓ Understand the difference between profit and cash

✓ Recognise indicators of liquidity

n = 23

Expert Interviews – Increased Literacy

✓Assists in identifying warning signs of cash flow issues✓Helps with understanding the effect of prior decisions on cash flow✓Allows for educated conversations with external stakeholders

n = 23

Expert Interviews – Aids/Hinders Literacy

Lack of time

Money restrictions

Low levels of basic financial education

✓ Improved when engaging advisors to explain

financial concepts

n = 23

Survey - Main source of advice for SBO15.64%

49.16%

18.44%

15.64%

28.49%

33.52%

14.53%

10.06%

10.06%

6.7%

13.97%

0.56%

1.68%

11.73%

How often do SBO engage an accountant or tax

agent in each year? n = 177

45.2%

33.33%10.73%

10.73%

SBO Interview – Cash Flow Management

Cash flow management (CFM)✓ Most believe that effective CFM relates to ability to satisfy debts and understand debtors and creditors✓ 16/17 keep financial records in a CAS including record of revenue, expenses, creditor and debtor invoicing✓ 1 participant records in Excel✓ Only 3 have a systematic cash flow management practices in place (all offer professional services)✓ 3 prepare a cash budget or business plan

n = 17

SBO confidence in cash flow management

n = 124

6.45%

11.29%

10.48%

44.35%

27.42%

1.61%1.61%

11.29%

4.03%

38.71%

41.94%

0.81% 0.81%

8.06%

5.65%

36.29%

48.39%

0.81%

17.74%

0.81%

4.03%6.45%

33.87%

36.29%

0.81%

SBO cash flow management activities

21.67%

28.33%

5%7.5%

0.83%

25.83%

10.83%

21.67%

25.83%

10%

20%

2.5%

16.67%

3.33%

21.67%

22.5%

5%

14.17%

8.33%

22.5%

5.83%

25.83%

41.67%

5%

5.83%3.33%

16.67%

1.67%

15.83%

27.5%

8.33%

10.83%

1.67%

30%

5.83%

15%

18.33%

10%

5%0.83%

48.33%

2.5%

n = 120

Cash flow management activitiesn = 120

5.83%

36.67%

4.17%

12.5%

9.17%

20.83%

10.83%

5%

17.5%

1.67%

9.17%

16.67%

36.33%

11.67%

22.5%

37.5%

9.17%

2.5%1.67%

21.67%

3.33%

11.67%

30.83%

10.83%

0.83%

40%

5%

2.5%

20%

45%

10%

8.33%

13.33%

3.33%

24.17%

47.5%

14.17%

2.5%2.5%

7.5%1.67%

SBO Interview – Understanding Financial

Statements

Understanding Financial Statements (FS) 59% saw minimal benefits in use of FS Too time restricted to use FS✓ Bank balance was seen as more useful for CF as it was current 11/17 use P & L but not for CF.Majority of SB do not make use of Statement of Cash flow or Balance Sheet.

Survey - SBO perception of usefulness of

financial statements for cash flow management3.48%

36.52%

39.13%

14.78%

2.61%1.74%

1.74%

2.59%3.45%

26.72%

39.66%

11.21%

6.03%3.45%

6.9%

36.21%

40.52%

9.48%

1.72%2.59%

2.59%1.72%

5.17%

4.35%0.87%

38.26%

35.65%

6.96%1.74%

4.35%7.83%

0.86%

55.17%

37.93%

3.45%0.86%

1.72%

Survey - Financial Statements assist in

understanding:

2.59%

0.86%

45.69%43.1%

3.45%

4.31%

6.03%

2.59%

12.07% 12.07% 35.34% 25.86%

0.86%

5.17%

6.03%

2.59%

11.21%

13.79% 37.07% 24.14%0.86%

0.86%5.17%

4.71%

3.45%

46.55% 41.38%2.59%

SBO Survey - Literacy

• ✓

SBO Survey - Literacy

• Encourage cash flow management activities

➢ What are they and can the SBO delegate these activities?

• Role of Advisers: frequency and purpose of engagement

• Accurate Vs timely records – importance for cash flow

➢ SB records primarily tax driven (not prepared for cash flow management).

• Need to engage in improving literacy ( careful with technical

terminology).

• Improve payment times to small business

Research Recommendations

THANK YOU