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Business performance is on the rise but SME confidence in economy remains shaky

Australian businesses feel they are performing better than in 2010 but confidence in the economy remains lukewarm and as a result businesses report only a marginal increase in confidence for the year ahead. That’s according to the SME (Small to Medium Enterprise) Business Sentiment Index 2011 sponsored by Sage, a global leader in mid-market business software.

Almost four in ten (38%) Australian businesses believe that business is better now, compared to this time last year, while nearly two out of ten businesses (17%) believe that business performance is worse. When it comes to the economy opinions are much more closely divided, with approximately one third (31%) of businesses believing that the economy is recovering compared to 2010, while a similar number (30%) state it has declined. Looking ahead, 33% surveyed reported feeling more confident about the year ahead while 28% said they were less confident than they had been in the previous 12 months.

Business size has a marked effect on the overall outlook with micro businesses (those with four or less employees) the least confident about the next 12 months compared to a much more positive outlook among small, medium and large businesses. Small businesses (defined as those with 5 -19 employees) demonstrate the most confidence, with four in ten (42%) expressing willingness to take on more debt to grow the business compared to three in ten (30%) for all businesses.

The repercussions of the global financial crisis (GFC) continue to exert a significant influence on business with many companies reporting more limited revenue growth, greater competition and cash flow issues. Three quarters (75%) of businesses state that their costs have increased since the GFC and that revenues have failed to grow by the same margin. Six in ten businesses have experienced an increase in cash flow issues since the GFC and also six in ten believe that customers have been demanding lower prices for the same service or product since the GFC.

Additionally, more than half of all companies (55%) agree that their staff are now working harder, but that profits aren’t going up respectively since the GFC. To cope many businesses have reduced reinvestment and cut back advertising and marketing expenditure. The worst of the post-GFC effects are reported in the resource-rich states of Queensland and Western Australia.

Challenges for 2011

Rising costs were identified as the number one business challenge for half (47%) of the companies in Australia in 2010 and businesses believe it will continue to be the major issue for 2011, alongside gaining new customers. Despite this, only one third (33%) of companies have put in place documented plans to tackle the problem. The report notes that this “planning gap” is likely to have a compounding effect on profits if projected revenues are not realised this year.

With business performance starting to pick up the issue of staff shortages is beginning to re-emerge as a major issue. Six in ten Australian businesses state that they are struggling to find sufficient numbers of skilled staff to meet their requirements. Exacerbating the problem – and contributing to concern for cost management – is the fact that three in ten (31%) businesses report existing staff are beginning to make demands for wage increases and almost half (47%) say they have increased pay levels during the past 12 months. Not surprisingly, the problem of staff shortages becomes more pronounced as business size increases.

The key business challenges for 2011 include:
· Rising costs (39%)
· Gaining new customers and accessing new markets (39%)
· Maintaining or growing revenue (33%)
· Managing cash flow (34%)
· Recruiting employees (25%)
· Funding and access to capital (24%)
· Increased competition (17%)

Women business owners emerged as “cautious pragmatists”, proving to be more conservative than their male counterparts when it comes to reducing prices, taking on debt or in their plans to grow revenue. Interestingly, women are less likely to believe the economy is recovering but they also less likely to have not reinvested in their business over the past year, a further sign of their pragmatic business nature and outlook.

Investment priorities

Technology remains a focus for business investment with more than half of all businesses (54%) planning to increase online software and services. Furthermore, investment in technology is the #1 key priority across all businesses, should budget be available for business development. Interestingly, female business owners appear to be more focused than men on the role of technology and the importance of the web as a business tool. The study speculates that this may be due to women’s greater relative presence in the retail and service industries – both of which are well-suited to the online environment.

Alan Osrin, Managing Director, Sage Software Australia, says, “It has taken time but businesses appear to be finally emerging from the GFC and state they are feeling more confident about the year ahead. However, events of the last six months such as natural disasters, continued rising costs and lower quarterly GDP figures could weigh significantly on these positive perceptions.”

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Natalie Tsirimokos

Natalie Tsirimokos

Digital Editor of Dynamic Business

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