Australian small to medium businesses have experienced cash flow impacts in the past year, due to factors like declining revenue, low cash reserves, and seasonal fluctuations. Cash flow can make or break a small business, and even the most successful SMEs can run into trouble without careful financial management. Gavin Debono CA shares practical advice to help small business owners avoid common cash flow pitfalls and keep their business finances healthy.

1Failing to proactively manage outstanding debts

When you’re busy running a business, chasing overdue invoices often falls to the bottom of the to-do list. But ignoring unpaid debts can quickly lead to cash flow strain, making it harder to pay suppliers, staff, and other business expenses.

Solution: Regularly track debtor days (the time it takes customers to pay), set clear payment terms, and follow up on overdue invoices. Use accounting tools like Xero to automate payment reminders and keep your accounts up to date.

Example: A small business owner discovered she had over $10,000 in unpaid invoices. After identifying slow-paying customers and addressing their concerns, she recovered the payments and boosted her cash flow almost immediately.

2Insufficient working capital

Growing businesses often face cash flow strain because they need to invest in materials, staff, and stock before seeing any revenue. Without enough working capital, even profitable businesses can find themselves short on cash.

Solution: Shorten your payment terms to get paid faster, negotiate better terms with suppliers, or explore small business loans or other forms of finance to cover gaps.

Example: A local café owner faced rising costs from inflation and higher wages. By securing a business line of credit, she was able to cover day-to-day expenses, pay suppliers on time, and keep operations running smoothly during peak periods.

3Overestimating future sales and revenue

It’s easy to get caught up in excitement when business is booming — but being too optimistic about future sales can lead to overspending and cash flow shortfalls when those sales don’t materialise.

Solution: Create conservative sales forecasts based on actual data, not just projections. Regularly review and adjust your forecasts to reflect current business conditions.

Example: Jordan’s new e-commerce store gained traction on social media, but sales lagged behind the hype. By adjusting his stock orders based on actual sales rather than online buzz, he avoided tying up cash in unsold products.

4Confusing revenue with profit

The golden rule of cash flow is to never confuse revenue with profit.  Overspending without considering outgoings like rent, wages, and stock can leave your business short on cash.

Solution: Track all expenses alongside your income and focus on maintaining healthy profit margins. Before spending revenue, ensure you’ve budgeted for upcoming costs.

Example: Sarah owns a small bakery that recently secured a large corporate order worth $50,000. Excited by the revenue boost, she immediately invests in new equipment and hires more staff without considering her upcoming expenses or volume of future orders. A few months later she realises that after covering her costs like ingredients, rent, and payroll her profit is much lower than expected.

5Mixing personal and business finance

Using personal credit cards or bank accounts for business expenses can create confusion, make tax time harder, and even lead to cash flow issues when you lose track of business spending.

Solution: Open dedicated business bank accounts and use separate credit cards for business transactions. This will make your financial reporting more accurate and help you stay on top of your cash flow.

Example: Jake runs a freelance graphic design business and frequently uses his personal credit card for both business and personal expenses like buying software, paying for client lunches, as well as his household bills. Come tax time he struggles to separate business expenses from personal ones, leading to errors in his tax return and missed opportunities to claim on legitimate deductions.

6Neglecting regular financial reviews

Without regular reviews of financial statements, it’s easy to miss small issues that can grow into major cash flow problems.

Solution: Schedule monthly reviews to check the financial performance of your business and treat it like a client meeting. Use this time to familiarise yourself with your incomings and outgoings, check your profit margins, adjust your budget, and make informed decisions about the future direction of your business.

Example: Emma, who runs an online boutique, assumed her business was doing well because sales were steady. But because she rarely checked her financial statements, she didn’t notice that rising supplier costs were shrinking her profit margins—leading to a cash flow crunch that forced her to take out an emergency loan.

7Scaling too quickly

Rapid expansion without proper financial planning can drain your cash reserves. Growing too fast can mean overspending on staff, stock, and equipment before your business is ready.

Solution: Build up your cash reserves before expanding, and secure financing if needed. Ensure your business is generating enough consistent revenue to support growth before taking on new expenses.

Example: Tom runs a small donut shop which quickly becomes popular. Encouraged by this, he decides to open three new locations within six months, taking out hefty loans, hiring more staff, and investing in expensive equipment. Before long he realises the new locations aren’t making enough profit to cover operating costs, and his cash flow is depleted. This forces him to close two of the locations, leaving him in a worse-off position than when he started.

8Failing to track inventory

Holding too much stock ties up cash that could be used for other business needs, while not having enough can mean lost sales.

Solution: Use inventory management software to track stock levels, avoid over-ordering, and ensure you have the right products available when customers need them.

Example: Trish, who owns a home décor store, often ordered large quantities of products she thought would sell well. But poor inventory tracking left her with excess stock of slow-moving items and not enough cash to reorder popular products or cover her operating costs.