Private businesses chase 20% profit growth in next 12 months as economy rebounds: survey

Private companies are expecting profits will jump by 20% over the next 12 months and sales will rise by 15% as the economy starts to gather pace, the latest Business Barometer from accounting firm PwC shows.

But the survey of over 1000 private companies with revenue between $10 million and $100 million also suggests skills shortages are a major growth hurdle, with 52% of firms reporting a lack of qualified staff was a constraint on hiring. 

The Business Barometer suggests sales and profits expectations for private companies are now at the highest point in more than three years.  

Over the next 12 months, companies are expecting average profit growth of 20%, with expectations highest in the business services sector, where profit growth of 26% is expected. 

Average sales growth of 15% is expected, with property and construction businesses tipping 19% growth. 

PwC private client partner Greg Will says confidence is extremely high among employers, who he likens to athletes – lean, well trained and ready to chase growth hard.  

“They see that the GFC is behind them and they’ve got a lot of confidence about the next 12 to 36 months.”

Will says while the profit projections do look high, it is worth remembering that many private companies are coming off a low base, and have cut costs over the last few years to the point where sales growth should fall to the bottom line.  

“It’s now about just making sure they can hit their top-line sales projections, because their profit margins are good as costs are still low,” he says.

However, Will does raise questions over whether some of these firms have the right strategies to deliver on their targets. 

The survey found 54% of firms plan to pursue organic growth strategies in the next 12 months, and just 32% say they will use acquisitions to drive growth. 

“That’s business as usual to us in terms of acquisitions,” Will says. 

“If something on the market looks good, it will be acquired. But there won’t be acquisitions for acquisition’s sake. 

“But in order to supercharge your business, you really have to do something different. It’s really about looking at your business in a new way.”

While that might be entering a new market (something 46% of respondents plan to do) or a new product area (50%), Will believes firms that intend to deliver on very high sales and profit growth numbers may to do something extra, such as hunt for acquisitions. 

One reason acquisitions might not be on the agenda is the question of obtaining finance, with 50% of companies reporting some difficulties obtaining finance.

Further, the average debt-to-equity ratio of companies on the list has fallen from 41% three years ago to just 17%, the lowest point on record. 

This suggests companies are taking an extremely conservative approach to balance sheet management as they’ve realised that bank funding is getting harder and harder to get. 

“Most of them either have given up or they think it is just too hard.”

This is further borne out by the fact a stunning 58% of firms do not intend to make a major investment in the next 12 months. 

While Will says a lot of investment was dragged forward to 2009 and 2010 by government investment tax breaks, the record low investment figure does underline the conservative stance taken by companies in the last few years.

“I think what you tend to see in downturns is that businesses get very much back to basics and do what most households do – pay down debt and retain cash so if something happens they’ve got a buffer.”

The survey also suggests that the days of the discount are far from over, with 23% of firms saying pricing will be their key strategy for beating the competition. 

However, Will says firms relying on pricing to drive growth may find it hard to produce sales growth of 15% and profit growth of 20%.

“Unless their competitors don’t really want to play the price game, those targets are going to be a challenge.” 

The problem of finding skilled staff is also growing for private companies. While 57% intend to hire in the next 12 months, 52% say finding qualified staff is an issue, and 32% nominated wages growth as another hiring hurdle. 

On average, the private companies expect wages growth of 7% over the next 12 months. 

Strategies firms plan to use to meet skills shortages and retain talent include bigger bonuses and a higher emphasis on flexible work arrangements, work from home, paid parental leave and employee share offers.

“These are things you would have only seen in big businesses 10 years ago,” Will says. 

“The private companies are really starting to compete with big business around the different types of flexible work arrangements they are offering.”