Small and medium-sized enterprise (SME) owners are struggling with dwindling cash reserves amid soaring inflation and cost-of-living pressures.

According to a recent survey commissioned by Prospa, 22% of participating entrepreneurs have no cash reserves, and 18% rely on funds covering less than a month’s expenses. About one in five expects to deplete their cash reserves within one to two months.

“The current economic conditions are such that small businesses are getting further away from the three to six months’ cash reserves recommended to cover operating expenses,” says Prospa Co-Founder and Chief Revenue Officer Beau Bertoli.

Retail and hospitality industries struggle

Reduced consumer spending – along with supply chain cost increases and rising energy expenses – has hit many small businesses hard. Data from the Australian Bureau of Statistics shows that in the year to April 2024, household discretionary spending rose by only 0.6%, compared to 5.8% in non-discretionary categories. This followed a period of no growth in discretionary spending in the year to March 2024.

Retail and hospitality businesses are some of the most affected. Official data reveals that retail sales fell by 0.4% in March 2024, after a small increase the previous month. In the hospitality industry, the impact of pressure on household budgets has led to a spate of business closures.

The situation is so severe that digital credit agency CreditorWatch predicts one in every 13 Australian hospitality businesses could fail within the next 12 months.

Figure 1: Household discretionary and non-discretionary spending

Source: Australian Bureau of Statistics, Monthly Household Spending Indicator, April 2024

 

Squeeze on personal finances

Personal sacrifices have become common among SME owners dealing with financial challenges. About four in five admitted to experiencing financial strain, with 46% opting to reduce their own incomes to cope with rising costs and 31% using their personal savings for their businesses.

These economic hardships have taken a toll on the quality of life and wellbeing of SME owners. According to the Prospa survey, 44% of respondents reported increased stress or burnout. Almost a third said they have less time for personal relationships and leisure activities as they focus on their businesses.

Adapting strategies

Despite challenges, Australian SMEs remain largely resilient, with around four in five indicating they have or plan to adopt strategies to combat rising costs in the coming year. This includes increasing support for technology adoption to help streamline operations and improve efficiency.

Cost-cutting measures also remain a priority for SMEs, with many planning to reduce non-essential expenses and roll out price increases to boost profitabiliy.

Importance of funding and broker support

Quick and accessible funding solutions are critical for struggling businesses, according to Roberto Sanz, Prospa’s General Manager of Sales and Partnerships.

“In today’s macro-economic climate where small businesses have little to no cash reserves, gaining fast access to additional funding can be critical to ensuring business continuity and success,” he says.

Sanz also emphasised the important role of brokers in supporting SME resilience.

“As businesses adapt to the changing [economic] climate, they’re increasingly seeking advice from brokers to navigate alternative funding options and gain access to the cash boost they need,” he adds. “By providing tailored and thoughtful solutions to their clients, brokers will enable SMEs to weather the storm and drive profitable growth.”

SHARE
Back to Insights and News

Related articles

All insights

Borrowers feel the heat of high rates

With interest rates staying elevated following a year of aggressive increases, mortgage stress is on the rise among borrowers. New data from Roy Morgan reveals that the number of Australians facing mortgage stress has increased by 724,000 since May 2022, when the Reserve Bank of Australia (RBA) began raising the cash rate from a record…
Read More

Housing market soars 40% four years after pandemic

The impact of the pandemic continues to shape Australia’s property market, four years on. Dwelling prices have exploded as factors such as population growth and limited supply drive competition for homes. According to data from PropTrack, national home values surged by 39.9% from March 2020 to March this year. Prices in regional areas soared by…
Read More

Australian SMEs grapple with rising defaults amid cost pressures

The rising cost of borrowing and reduced consumer demand are hitting small and medium-sized enterprises (SMEs) hard. Payment defaults among them have surged to a record high, making them more vulnerable to business failure. According to the latest CreditorWatch Business Risk Index (BRI), business-to-business trade payment defaults are now above pre-COVID levels and rose by…
Read More