Latest SME Compass report shows inflation, cashflow choking investment in half of Australian businesses

Australia’s small to medium-sized businesses (SMEs) continue to struggle under lingering inflation and cashflow pressures, leading to around half of them delaying investments in plant, equipment and people.

Banjo Loans SME Compass shows SME’s continue to face significant cashflow challenges, with close to half (45%) reporting they have delayed strategic investments and put off business opportunities in the past year due to ongoing uncertainty and a widespread lack of confidence.

The report highlights that cash flow issues have disproportionately affected certain industries, with manufacturing (56%), financial and insurance services (53%) and arts and recreation services (53%) experiencing the most delays in business opportunities as a direct result.

According to Banjo Loans CEO Guy Callaghan (pictured), this underscores the ongoing strain that SMEs – the engine room of the Australian economy – are facing as they navigate an uncertain economic landscape.

“Cash flow remains a critical issue for SMEs which highlights the importance of careful financial management to ensure SMEs can continue to focus on growth and run their businesses without losses in this uncertain market.”

But perhaps of even greater concern is the impact of the ongoing uncertainty and lack of confidence being felt in the sector. Just two years ago, 50% of the SME’s we surveyed viewed inflation as a growth barrier. However, in the past 12 months this figure has risen to 65%.”

According to the SME Compass data, the manufacturing, financial services and arts sectors are feeling the pressure more than most. These industries, often characterised by longer payment cycles and higher upfront costs, have been forced to make tough decisions about which opportunities to prioritise.

The SME Compass report also found that while two-thirds of SMEs were able to meet their cash flow forecast targets in 2024, one-in-three (33%) report they are closely monitoring cash flow and spending. Payment terms have also proven crucial, with more than half (55%) of SMEs now offering clients 30-day terms.

Despite the recent decision to lower interest rates, and encouraging signs of a slowing inflation, the latest Banjo data shows inflation continues to be the primary challenge for SMEs.

Guy Callaghan says many SMEs that had previously passed on rising costs to customers have shifted gears into 2025, now prioritising cost reductions and operational improvements to avoid further price hikes.

“Inflation has been a major hindrance to growth for SMEs, as it is driving up overheads. The SME Compass shows that 65% of SMEs cite inflation as a primary growth barrier, with 60% of SMEs saying overheads are the primary reason for cost adjustments. Meanwhile, 45% have raised prices to combat inflation, though this is down from 49% in 2022 and 47% in 2023,” Callaghan said.

The report further reveals that 65% of SME owners believe inflation will continue to hinder their growth in 2025, with this figure unchanged from last year. Looking ahead, 39% of SMEs plan to continue cutting costs to combat inflation, 36% intend to raise their prices further and 30% will become more selective with clients or sales.

Callaghan said a “greenshoot” in the data was that despite these current challenges, 68% of SMEs are on track to achieve their growth targets in the coming year. Of those that met targets, 70% focused on significant product improvements, and 66% invested in new technology to support business growth. However, inflation (39%), reduced consumer spending (33%), recruitment challenges (26%) and accumulated tax debt (18%) were cited as the key hurdles.

“There is a certain resilience and determination in the SME sector that is why it is such an important part of the economy and a key barometer of our economic outlook,” Callaghan said.

What we are seeing are SMEs continually flexing and adapting their approach to managing inflation by focusing on both internal and external cost reductions, without burdening customers, and all the time still striving for growth,” added Callaghan.

Other Key Findings from Banjo Loans’ 2025 SME Compass Report:

• Funding Plans for 2025: In 2025, 44% of SMEs are using financing, with 61% relying on bank loans, 28% on investments from founders, and around one-in-four (24%) using alternative lenders. Despite ongoing uncertainty regarding interest rates, more than half (52%) of SMEs remain cautiously optimistic for the year ahead.
• Recruitment Trends: While recruitment has become somewhat easier for SMEs over the past 12 months, attracting and retaining the right talent remains a significant challenge. Forty-five percent (45%) of businesses found it easier to hire in 2024 compared to previous years.

Looking forward, in 2025, 63% of SMEs report they plan to prioritise employee well-being as a key part of their workforce strategy. Additionally, 46% of businesses plan to expand their workforce in the next 12 months. SMEs in education and training (49%), financial and insurance services (47%), and manufacturing (44%) remain particularly concerned about labor shortages.

• Brokers and SME Financing: According to SME Compass data, 38% of SMEs used a broker in the past year, valuing their assistance in securing better interest rates and simplifying the financing process. The most common ways SMEs find brokers are through recommendations from accountants (46%), family or friends (31%) or broker comparison websites (23%).
• Transport Postal and Warehousing: SMEs in the Transport Postal and Warehousing sector are especially feeling the pinch, with 54% stating that inflation is a barrier to growth, compared to the 39% average. Additionally, only 69% of businesses in this sector report that clients pay invoices on time, compared to an 85% average across all industries. These businesses are also most likely to experience challenges when obtaining finance (31%) and are more likely to base their financing decisions on interest rates (54%).

Go here to read the report in full.