MGI Melbourne :: Business Solutions World Wide

The Up Side of the Down Cycle

I was determined this month not mention the GFC. There’s already too much bad news, and negative sentiment, as well all know, can be self-perpetuating. However I can’t seem to get away from it – it dominates the media and general conversation. It’s gruesome and fascinating at the same time. But, expanding my ‘Not all Doom and Gloom’ theme from late last year, we can focus on the positive side of the current financial crisis – for some businesses, the GFC will present great opportunities.

• When the going gets tough, the tough get going. Some businesses will inevitably, unfortunately, fall by the wayside, whether through bad luck or bad management – but those able and willing to tough it out will probably find themselves with a larger slice of market share just by surviving.
• Some businesses will have to be sold, either because of financial pressure, or simply because of ordinary events like retirement or ill health. Unfortunately for them they are unlikely to achieve the price they would have attracted in recent years. But that is very good for acquirers. For those that are cashed up, with strong balance sheets, there will be great opportunities to strengthen market position and achieve vertical or horizontal integration.
• We haven’t seen interest rates this low since the Beatles came to Australia in 1964. So, not only will there be acquisition opportunities, it will relatively cheap to fund them (even taking into account the 3% margin the bank is likely to add). And, although there is a credit crunch, bankers are still saying they’re open for business.
• While big businesses are shedding staff, there is a great opportunity for smaller businesses to finally recruit the skilled people they have not been able to attract during the skills shortage. This is the time for SMEs to assemble the team that can develop and implement a long term strategic plan by which the business can achieve its full potential.
• The Australian dollar is low, allowing our businesses to be more globally competitive.
• The Federal Government has announced a 30% tax bonus ‘investment allowance’ for new depreciable assets contracted before 30 June 2009 and installed by 30 June 2010, (with a 10% allowance for assets contracted from 1 July to 31 December 2009 and installed by 31 December 2010). This additional tax deduction effectively means that the Government is paying 9% of the purchase price (or more, if the business profits are taxed at a rate higher than the company tax rate). The tax bonus provides a catalyst for businesses to buy the capital equipment they need to be more productive, efficient and internationally competitive. Lower interest rates makes these acquisitions even more accessible. (Of course the attractiveness of the tax bonus depends on the business being profitable so that a tax saving has an immediate value).
• Commercial and industrial property is becoming more available and cheaper, even in areas that have had little vacant space in the last few years. Landlords may even consider offering incentives in exchange for a reasonable lease commitment. This could well be the time to find the location and the space the business needs for growth, market presence and logistical efficiencies, or just simply to present a more impressive face to customers and staff.
• Other business services are also becoming more readily available and more flexible in price, such as marketing and advertising, tradesmen and consultants of all varieties. The skills the business needs to develop and implement that strategic plan could be more accessible than they have been for years.

So, for businesses that are financially sound and well managed, this could be a highly rewarding period. When the downturn finally ends, they could find themselves with better staff, better equipment and better premises. They may have greater market share through acquisitions, or simply through industry rationalisation, and they may have found new overseas markets through a lower exchange rate and new skills and efficiencies. And they may have funded their growth, efficiencies and equipment with the cheapest funding we have seen for decades. Alternatively they could be frozen by fear and indecision and just sit and watch as the opportunities go by. They may survive the GFC but be ill prepared for the next economic upswing. To make the most of the opportunities it will take courage, conviction and a preparedness to work harder than ever. It will also take sound financial and business advice. As Chartered Accountants, we are in a prime position to help SMEs owners with the critical decisions that could make or break the business. If we are pro-active now, we could just make the difference between whether the SME comes through the GFC as a casualty, a bare survivor or a great success.