What a year it has been! This time last year we were expecting a soft landing. Now there is less expectation and more prayer.
This year has had the lot – share prices plummeting, interest rates rising then falling, banks contracting facilities and curtailing new lending, consumer confidence diving,and the Australian dollar losing thirty percent of its value against the US dollar in a little over two months. These are conditions that large businesses strain to deal with, for SMEs with limited resources it’s that much harder.
Pity the importers – how many were able to increase their prices quickly enough to recover the extra cost of inventory when the dollar plummeted? Pity the suppliers of high value items of machinery now that the banks won’t lend their customers the money to buy the machines. Pity the businesses with long inventory lead times that placed orders before the markets dropped and are now stuck with product that can’t be moved, suppliers who can’t be paid and bank overdrafts that can’t be reduced.
It’s no wonder that businesses are reviewing their cost structures and making hard decisions, such as redundancies. Those who can remember the early 1990s don’t want to be caught again with overheads that can’t be supported when turnover drops.
I wrote earlier this year on the need for businesses to get back to basic principles of asset and cash flow management. Since then I have seen many instances where the easy cheap money of the last few years has led to sloppy inventory control. Inventories have been allowed to build and now, when funds have dried up, it is near impossible to convert the stock into cash. Our insolvency practitioners will be busy.
Indeed the key risks to SMEs in difficult times are bad debts, overstocking and bloated, inflexible cost structures. Debt collection and purchasing are functions usually delegated down the line by business owners but a hands-off approach to key risk areas is a recipe for disaster – especially if the staff in charge of purchasing are basing their decisions on past usage or sales forecasts that are no longer achievable.
We are now seeing the credit crunch impacting on the real economy – real businesses running out of cash and real people losing jobs. Normal business activity and mergers and acquisitions are being hamstrung by the inability to access funding. Strategic business decisions are being put on hold due to the volatility and uncertainty of the markets. The same can be said for consumer decisions.
But there is always an upside. There are winners from the collapse of the dollar - businesses that export or compete with imported products and services. More competitive prices may well enable them to increase market share enough to compensate for a decline in size of the overall market. However many potential exporters will be nervous about undertaking marketing initiatives in the midst of a global downturn and this is where government incentives, such as the Federal Government’s export market development grant and Austrade assistance should be fully exploited.
While the business world in general has become overburdened with debt, particularly from over-priced acquisitions funded by cashed-up financiers desperate for deals, the SME sector and family businesses in particular, are generally more conservatively funded.
The 2006 MGI Australian Family and Private Business Survey found that, for family business owners, the most important sources of capital were cash flow and retained profits, and these were more than twice as important as bank loans. Family businesses have also generally been reluctant to take on external equity finance and are therefore less likely to become entangled in a divestment of assets by over-geared equity capitalists.
I, am always amazed by how many SMEs have a no-debt policy and have managed to not only survived but have grown successfully using only the reinvestment of their own profits. So despite all the doom and gloom, this will be a period of opportunity for some SMEs like this. We are still in the midst of an unprecedented period of business transitions as baby boomer business owners head towards retirement. Boomers who sold businesses in the past few years have achieved unprecedented prices but now there will not be the same demand or the high values for businesses. Those businesses that have been conservative in their funding and preserved the strength of their balance sheets, will have opportunities to make acquisitions at prices that will ultimately yield good returns.
No doubt we will see rationalisation in some industries as demand contracts and some businesses unfortunately will fail. Again it will be those businesses with good management and strong balance sheets which will not only survive but also pick up market share, positioning them well for strong growth when the economy picks up – which, we must remember, will eventually happen.
We go into the festive season hoping that consumer demand is strong enough to keep the economy ticking over. . Perhaps the Government’s cash hand out in December will act as a catalyst for consumer spending. I know I’ll be doing my bit – it could well be a shoe-led recovery!