With interest rate increases, fluctuating petrol prices, drought, lagging trade payments, and the credit crunch, SMEs faced tough challenges in 2007. Nukte Ogun talks to experts to find out what difficulties are on the horizon for 2008.
Blow after blow was dealt to SMEs in 2007. Everything from a strengthening Aussie dollar to the climate change debate—most of which were completely unexpected. So, to protect yourself from being knocked out by the unexpected, let’s look forward to what awaits business this year.
With more interest rate rises expected, it is not surprising that business owners are uneasy. Dun & Bradstreet’s September and October Business Expectations Survey revealed that interest rates are seen by 36 percent of executives as the most influential pressure on business in the upcoming quarter, with interest rate concerns at their highest in two years. “It is evident that rates will remain a key concern for SMEs in 2008,” says Christine Christian, CEO of Dun & Bradstreet Australia.
One option for small businesses to protect themselves from further interest rate rises, is either full or split-fixing loans. And with most financial institutions not charging additional costs to fix loans, it’s an increasingly appealing option.
“Businesses will also be affected by the tightening of credit that has resulted from the US sub-prime fallout. SMEs will find credit harder to access and more expensive,” says Christian. Delayed trade payments are expected to increase as a result. “SMEs could see considerably reduced business cash flow and impacts on resources, as staff are required to recover overdue amounts or are pushed to increase sales to make up the shortfall.”
Trade, Export & the Aussie Dollar
SMEs make up almost 90 percent of Australian exporters, according to the Australian Bureau of Statistics (ABS). What can they expect in the coming year?
“In 2008, we are likely to see the major capital investments in the resources sector come through into the export data, so if you think the resource export numbers are big now, you ain’t seen nothing yet,” says Tim Harcourt, Austrade’s chief economist.
But, while the resources boom continues, agriculture and manufacturing exporters will be constrained by ongoing drought and infrastructure hold-ups.
Also concerning, especially for exporters, is the Australian dollar, which is at its strongest since the 1980s, surpassing 90 cents against the US dollar in October. “It’s not at all good to see our dollar getting stronger and stronger. It makes it that much harder to be competitive,” says Martin Brook, co-founder of Brookfarm, gourmet food manufacturing company. “We’re actually beginning to hedge currency.” Despite the rise, Brook is adamant they will maintain the quality levels of their exports.
“The majority of our exporters don’t let fluctuations in exchange rates ruin their business plans,” says Harcourt. “They see the moving exchange rate as a fact of operating in the global economy, and make their decisions based on long-term plans and building strong relationships with clients, customers, and business partners.”
So the future is not so glum, but future plans should take into account infrastructure and skilled labour shortages.
An Australian Institute of Management (AIM) survey found that 51 percent of senior managers believe the skills shortage is the greatest risk to their business. Not surprisingly, staff retention has become a necessity, and the number of part-time workers has risen to form one-third of the Australian workforce.
“For employers to solve the existing employment shortfall it is important for them to explore part-time, job share and flexible employment options. They should look to target sections of society that have traditionally been neglected by employers,” says Liana Gorman, Part Time Online director. “Offering this potential workforce flexible working conditions to suit their lifestyle, will help to alleviate employee vacancies in all skill areas and will help to retain staff in the longer term.”
Staffing solutions are not always difficult. As with other SMEs, Brook finds hiring the right staff to be a challenge but, unlike some, he has little trouble retaining staff. “Our goal was to create an environment where people really wanted to come and work. Also, an empowering environment where people may start at the bottom but we work with people to bring them up in the organisation,” he explains. “We really want that feedback from people who are at the coalface doing the job every day. And the other thing is really valuing the people who come to work with us.” Creating relationships with staff, based on trust, is an important retention tool. Both business and business owner will benefit.
Outsourcing is also a useful staffing option. Doing everything yourself will only leave you burnt out, especially in areas where you don’t have experience, including PR, marketing, advertising and accounting. Trust others to pick up some of the slack.
Australian Workplace Agreements
Recent changes to the workplace relations system have created an onslaught of uncertainty, especially among SMEs. Only 21 percent of SMEs believe the changes will have a positive outcome, according to the Sensis business index for August 2007. Furthermore, only 55 percent of SMEs knew the fairness test was added among changes to WorkChoices.
Adding to the uncertainty is the Australia at Work Report, which shows workers on Australian Workplace Agreements (AWAs) earn around $100 less each week than workers on collective agreements. With retail chain Spotlight deciding to abandon AWAs altogether after finding the system too confusing, many are wondering what chance SMEs have. A combination of pre-WorkChoices agreements, WorkChoices agreements covered by the fairness test, and WorkChoices agreements not covered by the test, can create many misunderstandings in the workplace. So, whatever you decide to do, a clear plan is needed to ensure both workplace productivity and employee fulfilment.
Already climate change is having an impact on sustainable business, but will concerns remain in the spotlight, or fade into oblivion?
“Climate change, sustainability, and carbon footprint were far less an issue this year then they are coming up to the year ahead,” says John Downes, Deloitte Partner. “People have started to understand the concept and get onboard with it, and that’s why the next year is going to be dramatically different.”
Downes expects an increase in the sale of water, fuel, and power saving products and services. “Specifically around how to become carbon neutral, and how to assess people’s carbon footprint on the planet,” he adds. “That I think is actually a fabulous opportunity for small business, because it’s the sort of thing where small groups of people with skills or products can compete directly, because they’re agile enough to quickly adopt those products and services.”
Commitment to corporate social responsibility can also be an effective recruitment tool, especially for workers under 30. “Their choices are coming down less so to money, and more to the quality of the work they’re doing, the stimulation that they’ll get, and the sense that they’re working for an organisation that honours its social responsibilities in regards to climate change,” says Downes.
Keep clients satisfied, and watch your business grow. Brookfarm has an individual follow-up system for this reason. “Our customers are an integral part of our business,” says Brook. “We don’t have those systems where people press buttons to talk to machines. We have direct contact with our customers.”
For Brookfarm, providing quality products at the guaranteed time ensures custom
ers are left with a good impression, and this results in return business. Understanding what customers really want is essential, and the necessary tool can be as simple as a survey.
Finding out your ranking in comparison to the competition and making changes to your service if necessary, will also help. A major contributor to business failures is a lack of understanding when it comes to client relations and competition. “Ninety-nine percent of businesses are still unable to compare key performance components of their business with direct competitors and make critical alterations to decisions accordingly. The result is tens of thousands of businesses still fail in Australia each year,” says Chris Russell, CEO of the Business Reporting Bureau.
Key to Survival
With so many volatile elements in the business environment SMEs need to firmly manage the little they can control. “This means putting in place solid cash flow, receivables management and risk mitigation processes.
“SMEs should delay outlays for as long as possible while encouraging anyone who owes money to pay as rapidly as possible,” says Christian.
Prompt payment requirements include a solid receivables management function that provides clear credit terms, tracks customer payments, and acts against debtors.
“In addition, SMEs should implement simple credit checking processes to ensure they have a thorough understanding of the financial health of their customers. This includes an awareness of customers’ ability and propensity to pay on time,” explains Christian.
“Having a complete picture of business incomings and outgoings, and understanding customers’ financial health will be the key to SME survival in 2008.”
If necessary, enlist the help of a financial adviser to ensure you do have the complete picture, but get started today. Create a solid plan to face these factors head-on. And while you should review 2007, don’t dwell on it. SMEs can all learn from Percy Bysshe Shelley: “Fear not from the future, weep not for the past.”
Back to … the Past
We are all familiar with the maxim: those who ignore the mistakes of history are doomed to repeat them. Avoid a forecast of gloom and doom for 2008 by reviewing 2007.
Not unpredictably, according to Christine Christian, Dun & Bradstreet Australia CEO, interest rate rises topped the list of SME concerns in 2007, and more rate rises are expected in 2008.
While SMEs were also affected by increased petrol prices, the year saw a drop in the number of businesses negatively affected from 67 to 58 percent. A drop in businesses affected by the drought was also recorded, and now only a quarter of businesses feel the negative impact.
SMEs saw the effects of lagging business-to-business trade payments in 2007, with most payments taking three weeks more than the standard payment term, says Christian. Most failure to pay cases recorded by Dun & Bradstreet were for amounts less than $400, but these small payment evasions can add up to be big for SMEs.
Last, but not least, the credit crunch. Access to credit became, and will continue to be more difficult for SMEs, says Christian. Exporters in particular will suffer as Asia-Pacific trade partners feel the crunch and their importing capabilities decline.
Now to … the Present
SME business confidence is on the rise since last year, according to the Sensis business index for August 2007. The reasons behind this newfound confidence are good demand and trust that current economic conditions will continue. But governmental uncertainties and blame-shifting, along with rising interest rates, decreased business in certain industries, and increased competition, might change this upward confidence.
On to … the Future
So, what does the future hold? For starters, a rise in part-time work. With three million Australians currently working part-time, this section of the workforce is no longer made up of just students, mothers, and retirees. “Given the flexibility and reduced costs for employers, we expect part-time employment to continue to grow,” says Jason Baker, IBISWorld Australia general manager.
Also expected to rise is the unemployment rate. “We are expecting a rise in unemployment from around 2009 to 2010 and onwards, due to a forecast slowdown in the domestic economy, increasing worker productivity, with fewer employees required to perform the same tasks, and globalisation of the workforce, which may see more jobs lost to lower cost workforces in Asia and potentially Africa over the long term.”
Finally, there is likely to be an increase of workers between 55 and 64 remaining in the workforce, and an increase of female workers aged between 45 and 54 is expected. Both increases are needed for the economy to cope with Australia’s ageing population.