SME cash flow due diligence: What CFOs and Investors Should Assess
- 4 hours ago
- 9 min read
In a previous article, we detailed the attributes of a financially strong small and medium-sized enterprise (SME) from a CFO's perspective. Whilst that framework holds true, the challenges managing cash flows continue to put SME's under pressure. It is crucial for CFOs managing the finances of a private company, or for investors assessing opportunities in the Australian private mid-market, to understand the current liquidity environment to ensure sound decision-making.
As cash flow pressures build in a business, the CFO (as well as any future investors) must perform sufficient SME cash flow due diligence on the company's current and forecast financial statements to better understand future cash needs.
This article follows on from an earlier piece to examine the critical financial pressures, which should form the basis for SMEs’ operational strategy and investment due diligence.
The Liquidity Landscape: What the Data Reveals
Stakeholders, such as a CFO or investor, should develop a deep understanding of a company’s liquidity performance when performing financial due diligence in order to evaluate its financial health.
Over the last few years, research from YouGov (commissioned by Prospa) has found that approximately 2.5 million Australian SMEs are experiencing material cash flow issues. YouGov found that 42% of privately owned SMEs have less than 60 days of operating cash reserves. Further, 14–16% of these businesses have less than 30 days of cash in their bank accounts.
Consequently, over 1 million SMEs would be unable to handle an unplanned cash outflow, such as repaying a disgruntled customer, making upfront payments to a supplier for a large, ad hoc order, paying out a terminated employee or meeting a PAYGI increase issued by the ATO.*
A SME that is significantly constrained by inadequate cash is continuously exposed to the risk that a single event could render the company insolvent. Some examples include the loss of a substantial customer, a sudden price increase from a key supplier, higher loan charges in the form of higher interest costs, or legal, tax, or regulatory actions that have an immediate and unexpected impact on the company's cash reserves.
It is important to understand that cash constraints in a business will be viewed differently by various SME stakeholders. A CFO would view cashflow constraints or a lack of short-term working capital as a systemic vulnerability within a company. Whilst an experienced turnaround investor could perceive deficient liquidity as a possible value-creation opportunity to be delivered through business operations 'right-sizing', supported by a capital injection.
Whilst low liquidity represents acute systemic vulnerability to a CFO, for an investor, liquidity challenges signify a financial risk requiring mitigation from which the opportunity to unlock potential value exists.
Diagnosing the Underlying Drivers of Deteriorating Liquidity
Conducting a financial analysis on a company to determine its financial health must include identifying the causes of any deteriorating financial health. Primarily, there are three critical areas that stakeholders must focus their attention upon:
Increasing accounts receivable. This is due to a problematic customer failing to pay their compounding balance, or a company’s finance team not keeping up with receiving prompt payment from numerous customers. A CFO or investor should analyse trends in debtor days (accounts receivable) across multiple time periods. Deteriorating collection efficiency often indicates far-reaching customer financial stress or inadequate credit management, both of which reduce available working capital.
A cynical investor might question whether these customers do, in fact, owe any money at all. Has the company front-loaded sales by issuing invoices ahead of time before the customer has in fact taken possession of the latest shipped order of a product?
A quick perusal of an SME’s periodic balance sheet statements will quickly identify if there are constant, material amounts reported for accounts receivable and deferred revenue (a liability on the balance sheet).
Regulatory cash flow obligations (compliance). According to the Australian Tax Office (ATO), 65% of the nation's $50B+ collectable tax debt sits with SMEs - reflecting increasing tax debt balances. This has been identified as one driver behind the ATO's increasing focus on real-time remittance of employment-related withholdings for income tax and superannuation.
Often, cash-flow-constrained companies use GST collected from sales or PAYG withheld to cover payroll, critical supplier payments, or loan repayments. This can quickly become a true slippery slope for an SME’s liquidity and working capital position.
Compliance is usually associated with regulatory or government obligations around taxation. However, in some instances, where an SME enters a payment arrangement with a critical supplier, this can evolve into a legal obligation if the SME fails to honour the terms of the arrangement. Like defaulting upon a payment plan with the ATO, a delinquent creditor can take legal action to garnish an SME’s inventory. In the case of a tax authority like the ATO, they can freeze an SME’s bank accounts or in extreme cases, force bankruptcy upon the directors or officers.
Stakeholders should perform detailed due diligence, around an SME’s historical tax compliance and any other payment arrangement history.
*The legislated commencement of Payday superannuation on the 01-07-26, will only act to compound the cash flow pressures experienced by most Australian SMEs.
Margin erosion - price maker versus price taker. According to research commissioned by the Commonwealth Bank of Australia in 2025, 89% of Australian SMEs reported an increase in business costs over the previous 12 months. Most of these companies can only pass a small proportion of these cost increases to customers. For a company viewed as a price taker, they often need to absorb increases in input costs or accept the inevitability of losing customers.
Margin erosion is an important liquidity risk assessment for CFOs and investors. This requires a robust cost management and pricing strategy review to be conducted. For an investor, it raises questions about a company’s competitive positioning and the credibility of historical margins.
Capital Structure: A Priority for SME Cash Flow Due Diligence
An SME’s capital structure can increase or reduce operational liquidity stress. In the current business environment, this means balance sheet analysis is an even more vital element of any SME cash flow due diligence by a CFO or prospective investor.
Assessing Funding Flexibility
Conventional bank lending to SMEs has tightened, as evidenced by longer approval timelines and greater demands for collateral, including personal guarantees that are secured against the business owners’ primary residence. These arrangements have driven a substantial sea change with SME funding preferences, not just in Australia but worldwide.
According to Lumi’s Q2 2025 SME Lending Landscape report, 36% of Australian SMEs now prefer non-bank capital financing options, citing faster access and more accommodating lending terms as key drivers.
CFOs and investors must examine the complexity and flexibility of existing funding arrangements when evaluating a private SME. Some of the key questions that should be asked should ask when performing due diligence on an SME include;
Does the company have undrawn credit facilities, and what are the details of these?
Are current debt covenants at risk of breach under financial stress scenarios?
Has management arranged / have access to alternative sources of funding?
Note, companies with a heavy reliance upon one lender or one form of lending, represent increased refinancing risk. Although most businesses are aware of the risks posed by a major supplier or a key customer, they are often unaware of the inherent risk of relying on a single lender.
Debt Capacity and Headroom Analysis
An SME’s operational choices and capital structure influence its ability to assume additional credit (debt servicing) or its need for equity capital to fund current operations and growth.
Stakeholders must be acutely aware that an already highly geared and indebted company will struggle to fund working capital expansion or be able to pursue an inorganic growth strategy, e.g. a corporate acquisition. Alternatively, a company with low leverage or a lazy balance sheet could reflect a management team's aversion to risk-taking, which can equally inhibit growth.
A CFO and their investors must be aware each SME’s optimal capital is unique. It’s based upon the company’s industry, growth stage and macroeconomic conditions. Stakeholders need to be confident in the company’s management presenting a credible capital strategy, which can support operational needs and strategic objectives.
Operational Finance Capabilities
Stakeholders like the CFO and their investors must assess a company’s financial management capabilities and how resilient it is to financial seasonality. There are certain areas which warrant particular attention.
Creditor Management Sophistication
A company’s approach to accounts payable is an important indicator of how it manages finances and stakeholder relationships. When it comes to due diligence, it is imperative to review aged payables trends, supplier concentration and history of delayed payments or supply disruptions. A company’s financial statements may not reflect how it is managing creditors, e.g. reactively on an ad-hoc basis, which could result in relationship harm and supply chain risk.
Working Capital Management
Optimising working capital becomes even more crucial during periods of financial constraint for SMEs. As discussed, the ability of a CFO and the company to improve accounts receivable collection days, reduce inventory holding days and volumes, and extend accounts payable terms can significantly improve a company’s liquidity position.
When managing working capital, the approach must be completed with a degree of strategic and commercial thought. SMEs can't afford to damage crucial customer relationships through aggressive receivables collection or unreasonable payment deferrals that alienate critical suppliers, which can create far-reaching, longer-term problems that far outweigh the short-term cash flow benefits they achieve.
Working capital management must be pursued with an optimisation focus rather than a maximisation lense.
Financial Reporting and Visibility
According an OFX (IPSOS) survey, 80% of Australian SMEs still use manual processes for expenses. This is despite most SMEs viewing financial management centred upon real-time transaction oversight as essential. The vast majority of SMEs continue to operate with delayed or incomplete financial information, relying on monthly financial information finalised weeks after period-end.
This represents a red flag for prospective business partners, lenders or investors. Furthermore, it prevents the CFO and the executive team from responding in real time to performance challenges with the SME.
Adopting rolling cash flow forecasting and daily cash position monitoring is now a standard requirement for SME CFOs. For an investor, such timely and high-quality management reporting delivers important insight into operational control of an SME. Hence, SMEs unable to provide accurate, up-to-date information represent both an operational risk and integration complexity for stakeholders.
Investment Implications and Value Creation Levers
The previously mentioned challenges with SMEs signify both risks to alleviate and opportunities to harness. A few ideas emerge for growth capital investors assessing Australian SME opportunities.
Working capital as a value driver. Management of SMEs must find solutions if their working capital position is sub-optimal. As discussed, CFOs of SMEs must seek to reduce accounts receivable days, optimise inventory stock levels, and better negotiate supplier terms to materially free up cash with sacrificing revenue growth, whilst enhancing operational resilience and financial return KPIs.
Optimal capital structure. A recapitalisation of an SME that better aligns funding with its operational requirements and growth objectives should help a business that is inefficiently capitalised.
Financial management expertise. Many SMEs often lack internal expertise to execute a sophisticated financial management plan to improve liquidity. Embedding this expertise provides the means to strategically manage the cash flows, liquidity and financial performance of the business.
Conclusion
The liquidity pressures experienced by many Australian SMEs is acute. It is emerging as a structural, not a temporary problem in most cases. Both CFOs and investors must adapt their analytical approaches accordingly. CFOs need to shift the focus of cash flow management from being an operational function to a strategic priority. Whilst investors must integrate the focus of liquidity resilience into their due diligence procedures and identify SMEs where the addition of capital and financial expertise can deliver profound value creation.
Financial strength represents more than simply balance sheet metrics. It also represents management proficiency, strategic positioning, and operational resilience. The current business environment creates a need to comprehensively stress-test the critical qualities of a company that make it durable and resilient to economic headwinds and provide a strong platform for executing its next stage of growth.
Find Out More
At Fusion Private Capital, we work with private business owners who are looking to strengthen their company's financial position — whether that's ahead of a capital raise, a potential sale, or simply to build a more resilient business. We understand the cash flow and working capital realities facing mid-market SMEs, and we can help you assess where your business stands and what options are available.
If you're navigating cash flow pressures, exploring growth capital, or simply want to understand how to improve your company's financial resilience and long-term value, we'd welcome an initial conversation.
Connect with the Fusion Private Capital team to begin a confidential discussion about your business's financial strategy.
This article is general in nature and does not constitute financial, legal, or tax advice. We recommend seeking professional advice tailored to your specific circumstances before making any decisions relating to the financial management or capital structure of your business.
