Just how good or bad are business conditions going to be in the future? Oil prices, interest rates, skills shortage, softer business demands, industrial relations reforms, more red tape; these are just some of the issues confronting SMEs. Cameron Cooper reviews business conditions of the last year, and looks at the year ahead.
A glance over the past year’s business headlines paints a worrying picture for small and medium business. “Oil prices cloud business outlook”—“IR laws put bosses at risk of jail over AWAs”—“Rates hit business confidence.”
Such issues have been among myriad challenges confronting SMEs over the past 12 months. Throw in fears about compliance and red tape, drought and the threat of competition from powerhouses such as China, and the outlook may seem grim.
Not all are feeling sorry for themselves, however. Victorian-based manufacturer Safetech specialises in the design and production of industrial safety equipment to better manage lifting and manual handling problems. One of its products, a stretch-tape wrapping machine that secures boxes on pallets, is being distributed by international tape manufacturing giant 3M. Safetech’s recognition as the 2006 Telstra Australian Business of the Year proves it can succeed despite tough trading conditions.
Managing director, Lindsay Wakefield, says a sluggish manufacturing sector has forced the hand of his company and others. As a result, many SMEs are learning the value of good business processes and trying to be as efficient as possible “so we don’t handle the same piece of paper or enter the same data multiple times”.
Wakefield admits Safetech sells “unsexy stuff”, but a growing paper trail around occupational health and safety legislation in the workforce is creating demand. “No one gets up in the morning and says I really want to buy a lifter. They get up and say I have a problem at work and I have to solve it.”
In assessing trends in the Australian SME sector this year, attention immediately turns to the resource-rich states of Western Australia and Queensland. Demand for coal and gas is filling the coffers of mining giants like BHP Billiton and Rio Tinto while creating demand for smaller service suppliers.
Yet the double whammy of higher interest rates and skyrocketing oil prices is dampening the outlook for many domestic businesses and creating a “two-speed economy” that sees traditional powers such as NSW, Victoria, and South Australia trailing Western Australia and Queensland. Sectors such as construction, mining and health services have been thriving, while agriculture, transport, manufacturing and storage have struggled.
With interest rates and fuel prices spiking this year, Deloitte Growth Solutions partner, Alan Scott, says many SMEs are trying to control costs. “It has forced businesses to take another look at what they are doing,” he says. “While we’re not saying that the increase in petrol prices is positive, the smart SMEs see the situation as a [chance to say] ‘my costs are going up, I need to get smarter’.”
Scott suggests many strong businesses have shown signs of budget complacency and external factors are “giving them a bit of a wake-up call”.
A headline-grabber over the past 12 months has been the Federal Government’s controversial industrial relations reforms. In October, Prime Minister John Howard attended employee Bob Raven’s signing of the one-millionth Australian Workplace Agreement at Adelaide business Comrec, a disability support service.
While Howard has hailed the AWAs for taking the shackles off business, unions say they have led to a loss of wages and conditions for most workers. And new WorkChoices legislation seems to have confused bosses and employees, with an Australian Institute of Management (AIM) survey revealing that two-thirds of participants had little to no understanding of the new laws.
Jason Baker, general manager of business research firm IBISWorld, notes that business productivity has been poor in Australia over the past year. He argues that the Howard Government has been too optimistic with its aims to generate employment and productivity growth through WorkChoices. “The Government’s big gamble with the IR reforms was that it was going to bring about substantial productivity gains, and I think they were overly ambitious in what they thought might come out of that.”
Baker agrees that the IR reforms are confusing businesses, with union test cases muddying the waters and spooking Canberra. “The Government sees that as bad publicity” he says.
Perhaps the most pressing issue for business is a talent shortage. Low unemployment rates, a brain drain overseas and dwindling loyalty among younger staff have made it difficult for many companies to recruit and retain staff. And business growth is stalling because there are insufficient workers to handle projects. According to a mid-year report from recruitment firm Talent2, more than 20 percent of Australian business owners are eyeing overseas markets for staff.
At Safetech, Wakefield says his business location in regional city Moe makes it difficult to keep his best employees. “A rising star can quickly rise out of your orbit,” he says, adding that union concerns over dismissal laws under the IR reforms are largely misplaced because bosses want to hold on to staff, not fire them.
“We want their brains and their hearts. If we don’t look after them we’re not going to get the value.”
In keeping with staff shortages, pressure on wages is increasing. The AIM’s 42nd annual national salary survey found that SMEs paid staff an extra 4.8 percent this year as they battled record staff turnover levels of 14.5 percent. When AIM data on staff turnover was first collected in 2001, small company turnover was a mere 10.6 percent.
There is little doubt that interest rates are occupying the minds of business and consumers. Research from the Australian Chamber of Commerce and Industry indicates that for the first time in six years interest rate charges are now in the top 10 investment constraints for business.
The Reserve Bank delivered rises of a quarter of a percentage point in May and August, lifting the cash rate to six percent. Many analysts are predicting a rate hike in November. There is a double-edged sword with higher interest rates—they stifle consumer spending while also making borrowing harder for businesses.
IBISWorld confirms that rate rises have been partially responsible for the poor SME environment in states such as NSW and Victoria. A combination of higher rates, serious levels of indebtedness and stagnant property prices have stalled growth outside Western Australia and Queensland.
“If you are a small business in those states things are looking pretty rosy,” Baker says. “But if you are in NSW, in particular, things are tougher.” As the Reserve Bank ponders further rate rises, Baker says business is getting the jitters. “They start to panic and start to question investments.”
One area in which business and the public have shared pain over the past 12 months has been at the bowser. For construction and transport-related companies, the impact of rising fuel prices has been enormous. In Dun & Bradstreet’s National Business Expectations September survey, an overwhelming 73 percent of executives surveyed indicated that high fuel costs would be the key factor influencing their operations over the final months of 2006. And some experts believe the price of oil will continue to rise until world oil production peaks in 2010.
Speaking in Perth recently, the respected London-based editor of Petroleum Review, Chris Skrebowski, predicted that world production would peak at about 94 million bar
rels of oil per day at the end of the decade. He urged the global community to develop new fuels or technologies before production peaks or run the risk of disruptions to fuel supplies.
The Year Ahead
Looking to 2007, the outlook for SMEs depends on which surveys you read. However, the latest Sensis business index says small businesses are growing more and more fearful about the future of the Australian economy because of rising fuel prices, softer business demand, and higher interest rates. Other analysts also express concerns about sales growth, profits, employment and inventories.
SMEs have been told to start planning now to protect their cash flows amid news that SME tax debt has risen dramatically over the past three years.
Greg Charlwood, managing director of Bibby Financial Services, has warned SMEs to review their operations, adding “careful planning is a way businesses can safeguard themselves against pressure on cash flow when the economy slows down”.
Bibby is one of the leading suppliers behind a trend towards factoring and discounting, which allows businesses to convert up to 90 percent of their unpaid invoices into instant cash within 24 hours, providing SMEs with the continual injections of cash required to ride out tough trading periods.
Succession planning looms as a crucial issue, for family businesses in particular. Deloitte’s Alan Scott believes this is compounded by the option-rich Generation Y who in many cases will go their own way rather than take over their parents’ business.
“It will be one of the biggest impacts on private business going forward,” Scott says. “The real difference with the two generations is the availability of opportunity.” The change will result in a lot more trade sales and, in some cases, businesses opting to try to float on the stock exchange.
Elsewhere, the Council of Small Business Organisations (COSBOA) of Australia says a greater emphasis on staff training is emerging as a big issue for SMEs. COSBOA chief executive, Tony Steven, says businesses are demanding staff with higher skill levels courtesy of training through university, TAFE, trade qualifications, and business coaching and mentoring. “You may be a good plumber or a good gardener or a good computer operator, but not too many people who are in small business have had formal business education,” he says. And tradespeople with traditional Certificate III qualifications will be encouraged to go on to Certificate IV levels that include business modules.
Not all the news is bad for SMEs. Franchising continues to be a growth market, with home services, health and fitness and senior care businesses being among the hot options. And small businesses in logistics, personal services, childcare and hospitality are the likely winners from the Howard Government’s planned tax cuts that will inject billions of dollars in disposable income to the economy.
All the same, the heat will continue to be on sectors such as manufacturing, which has been in long-term decline because of cheap foreign imports and a strong Australian dollar that has cut competitiveness. In the 1960s, manufacturing represented about 30 percent of Australia’s gross domestic product; a figure that has dropped to about 12 percent today.
The key to survival, as Safetech demonstrates, will be an ability to fill profitable niches or develop unique intellectual property.
Lindsay Wakefield remains cautious about the business outlook for the next 12 months. He expects little market growth and “lumpier” sales.
Safetech, though, is confident it can plug a market gap that is not being served by high-volume, low-cost Chinese rivals. As Wakefield explains it, the company spots “islands of opportunity in a sea of low-cost manufacturing sharks”.
“We are looking for those islands,” he says.
The Big Issues
- Industrial relations reforms: New workplace relations laws have added to red tape for small business owners. The agreements require compliance with 17 procedural demands. Fines of up to $33,000 per breach have forced many SMEs to employ the aid of lawyers and consultants.
- Recruitment and retention: Small and medium businesses are finding it increasingly difficult to recruit the skilled staff needed within the workplace. According to the Department of Immigration and Multicultural Affairs, these shortages have led to a 22 percent increase in employer-sponsored migration.
- Skyrocketing oil prices: Consumers are now accustomed to paying $1-plus at the bowser. The heaviest impact, though, has been on the transport and construction sectors, whose heavy machinery is thirsty for fuel. Costs seem to be easing, but oil remains an issue of great unpredictability heading into 2007.
- The outlook: Business confidence is on the slide, according to the Sensis business index for August 2006, which indicates that confidence among SMEs has not been at a lower point since November 2001. The villains are rising fuel costs, softer business demand, and higher interest rates.
- More grey matter: Prime Minister John Howard shows no signs of retiring, and he wants fellow over-60 workers to stay at work. With an ageing population, getting elderly Australians to stay at work or return to employment will be crucial. Participation rates among women and the disabled will also be a subject of debate.
- Training and incentives: With the skills crisis unlikely to disappear quickly, the onus will be on SMEs to create attractive employment packages that lure staff without relying solely on wage rises. Flexible work arrangements, training incentives, and even profit-sharing initiatives are among the likely options.