iscover 
According to ScotPac’s SME Growth Index Report, the new Payday Super regime, which came into effect on 1 July and requires businesses to pay superannuation at the same time as salary payments, is putting immediate pressure on cash flow.
The report, which interviewed 727 SMEs with annual revenues of $1 million to $20 million, found that 74 per cent of businesses said that they were not fully prepared for the change or expected their cash flow to suffer.
Smaller SMEs have reported the greatest exposure, with 83 per cent of businesses with annual revenues between $1 million and $5 million predicting a negative impact on cash flow, compared with 64 per cent of SMEs turning over between $5 million and $20 million.
What’s the issue?
Speaking on Broker Daily’s Finance Specialist podcast, Accendo Finance director Trent Carter explained how the frequency of superannuation payments could up-end an SME’s cash flow position.
“In terms of cash flow, frequency is everything,” Carter said.
“If we just break it down inside a business and look at how cash flows through the business, the faster we can collect our debtors and the longer we can stretch our creditors, the more cash exists in a business at any given time to do the things that we need to do.
“Not profit, not revenue, it’s cash that exists in the business. By bringing forward one of their payments, their creditor used to sit on a 90-day cycle. They’d had 90 days to accumulate that cash and pay that bill or pay down the overdraft to redraw the overdraft.
“It’s now happening in smaller chunks more frequently, so it’s absorbing that cash a little bit quicker.”
Carter said that some businesses were responding to the pressure created by Payday Super through means other than finance.
“Whenever we change something, something else has to change to accommodate it,” Carter said.
“We’ve seen some businesses that were on weekly pay cycles who have mitigated this by pushing out the staff’s wages to monthly. That’ll make their money last longer, they’re controlling their cash flow by pulling other levers in the business.”
Credit solutions at hand
However, as ScotPac’s study suggests and as previous studies, including those from SME lender Prospa, have found, many businesses were not prepared and are now looking at potential credit solutions.
While a quarter of SMEs intend to keep their solution in-house by drawing on existing balances or equity, a further 37 per cent of SMEs plan to use an external funding facility, including payroll funding (16 per cent), invoice finance (10 per cent), overdraft accounts (5 per cent), lines of credit (3 per cent), and short-term business loans (3 per cent).
“A lot of businesses have known this is coming, but they haven’t necessarily done the planning for it,” Carter said.
“This is having a big impact on businesses that run a tight, short-framed cash-flow cycle. I think there is the opportunity then for brokers to work with businesses like this to identify what their cash-flow cycle is and get the appropriate working-capital limits in place to help businesses accommodate for this.”
Brokers speaking to Broker Daily have flagged a potential “structural shift” in how SMEs manage cash flow and access credit as a result of Payday Super.
ScotPac CFO David Kirwan said that brokers could help businesses quantify working capital shortfalls before they hit.
“Every pay run now has the potential to reduce funds available for suppliers, inventory, equipment and business investment,” he said.
“SMEs should map the timing of customer receipts against wages, super and other major commitments. That helps identify pressure points early and distinguish a temporary timing mismatch from a more persistent trading issue.
“Where a genuine timing gap exists, appropriately structured finance can help preserve liquidity and keep essential expenditure and investment on track.
“The right facility should match the business’s operating cycle and repayment capacity.”
[Related: SMEs push for growth despite ATO and Payday Super pressures]
Want to see more stories from trusted news sources?Make Broker Daily a preferred news source on Google.
