Macroeconomic positives mask the crisis for SMEs
If you’re a business owner, beware of putting too much value on recent domestic euphoria generated from successive CommSec State of the States reports that had SA atop lists for economic growth, the jobs market, construction work done, and dwelling starts.
For these positive macroeconomic indicators have tended to obscure micro issues (for example rising costs, profitability, and labour availability).
It’s these micro issues together with the Australian Tax Office (ATO) $34b debt recovery campaign that are causing industry commentators to say -- despite some pluses in population and some GNP growth – that Australia is suffering the greatest number of corporate collapses since the 1991 recession (most of which are among smaller SMEs).
According to a South Australian Business Chamber and William Buck Survey of Business Expectations, only 15% of the state’s businesses are recording increases in profit.
There’s been much media-reported concern about the cost-of-living crisis battering the economy, but little acknowledgement of operating challenges confronting small businesses that account for 99% of Australian business enterprises.
According to Luke Achterstraat, CEO of the Council of Small Business Organisations Australia, this lack of concern needs to change, particularly among politicians who have the power to improve operating conditions for thousands of business owners “now in crisis on all fronts”.
Events have proved him right when he said ASIC’s report of the collapse of 7747 business in nine months to the end of the March represented “only the tip of the iceberg”.
Now, many owners of failed businesses are electing to shut up shop and walk away rather than involve themselves in the further financial impost of insolvency proceedings.
Financially distressed SMEs in SA were hoping the recent state budget would improve the “operating conditions” Mr Achterstraat referred to, by, for example, yielding to the SA Business Chamber’s longstanding push for a wholesale reset of payroll tax. But that didn’t happen.
Instead, businesses were invited to apply to the government’s Economic Recovery Fund on a first-come-first-served basis for grants to a maximum of $50,000 for “energy efficient programs” that require a matching contribution from the applicant.
It’s hardly surprising in these circumstances SMEs have not taken kindly to big businesses getting $13b of handouts in the May 14 federal budget when they couldn’t even get restoration of the full instant asset right-off.
Given that SA has recorded the best economic growth of any of the states in two of the past three years, Macks Advisory is also aware of state budget disappointment shared among many SMEs, a disappointment that’s exacerbated by the budget’s forecasts which are from gloomy to dismal for economic and jobs growth (the later forecast to rise just 0.75% in 2025-6).
A looming hazard
Because, according to the pundits, inflation is “sticky” (that is it’s sticking around rather longer than predicted) they say levels of business angst are likely to be very much influenced by what the Reserve Bank of Australia (RBA) does about interest rates (unaltered in recent months and showing no sign of decreasing any time soon).
Indeed, the Bank suggests inflation at year’s end could be higher than it is now, and accordingly investors who bet on monetary policy changes, and about three months ago were saying there was a 16% chance the next rate change could be a rise, are now forecasting there’s a 50% chance of an increase before Christmas.
What’s more there are economists who fear the effect of the most recent federal budget will be expansionary and add to inflationary pressure.
Stage three tax cuts will give millions of Australians more cash in hand each pay cycle as household and business cash flows are being enhanced by budget subsidies; all of which incites questions about whether current monetary policy settings are sufficiently restrictive.
In recent months most economists clearly believed RBA governor Michele Bullock and her board were on track in their campaign of 13 successive rate hikes to bring the 2022 inflation rate of 8% down to less than 3% by next year.
That view has changed. The majority has become a minority, and in a recent statement Judo Bank chief executive Chris Bayliss said that irrespective of what the RBA does about rates, “businesses are at best simply going to have to adjust to paying a cash rate beginning with a three, for the foreseeable future, and make decisions associated with that”.
Another looming hazard
But another serious and more clearly defined problem looms for many business owners.
Analysts have estimated that following introduction next year of businesses’ requirement to pay super at the same time as wages and other entitlements, 22.6% of all SMEs are at risk of becoming insolvent.
The new law is designed to stamp out the proliferating practice of many companies that attempt to enhance their cash flows by not paying super entitlements – a practice, that according to the ATO, has been costing the Treasury about $4b annually in recent years.
MYOB modelling shows that more than one in five businesses, if required now to be up to date with super guarantee (SG) payments, would immediately have negative bank balances -- if they aren’t already in negative territory for at least one pay day date in a month.
And more frequent SG payments -- especially when these are aligned with paydays -- seem certain to result in defaults and consequent penalties for employers already under financial stress.
How concerned are banks?
In urging business owners to make decisions based on persisting inflation and a cash rate of not less than 3% for the foreseeable future, Judo Bank chief executive Chris Bayliss (referred to earlier) says banks are also concerned the economy’s current problems and what it faces in the next few months, will escalate insolvencies and impair their assets.
Judo, apparently like other banks, is busy shovelling cash into protective provisions. It’s latest set of results we’ve seen suggest the bank will probably lift provisions it’s already sitting on $95.7m of impaired assets and will need a further $130.5m in provisions -- given the economy’s likely stress on borrowers this year and next.
Banjo Loans CEO Guy Callaghan says his lender, which offers unsecured financing, is seeing a spike in business collapses and expects sticky inflation to heighten further provisioning levels.
Conclusion:
Macks Advisory sees virtue in advice from managing director at William Buck SA Jamie McKeough, who urges business owners not worry about things they cannot control – for example, what banks will do with loan conditions, what the RBA will do about interest rates, or how long it will take the federal government to do things that will make it easier to run businesses instead of harder.
Mr McKeough says it’s also useless for business owners on the brink of insolvency to wonder how long it’ll be before the federal government takes the hard reform decisions necessary to curb inflation, rather than relying on the RBA to do the job.
He says (and consumers won’t like this): “I encourage businesses, if possible, to consider a price increase strategy. Even a modest increase could offset rising costs and maintain profitability.”
