The big squeeze

There is some great data out this morning that illustrates exactly why Australia’s SME community is finding things tough at the moment – four key business problems are whacking entrepreneurs at the same time.

First is the issue of pricing, which emerged as one of the big concerns in the PwC Private Business Barometer which was released this morning. While the businesses surveyed put people problems at the top of their worry list (as they always do) the issue of pricing is number two with a bullet.

As PwC partner Greg Will explains, there are a number of reasons companies are being forced to drop prices, including weak consumer confidence, pressure from imported goods made cheaper by the rising Australian dollar and the fact that they need to grow revenue after slashing costs so deeply in the last five years.

But as Will also explained – and this is problem number two – he is seeing a lot of businesses carrying far too much stock, either because their sales have been poor or they have ordered up big because the Australian dollar has helped them get good deals. Too much stock only increases the pressure to keep discounting.

The third issue is wages – the PwC barometer says wages are set to rise 6% over the next 12 months. That’s double the rate of inflation and while it is an average – some companies could see much higher or much lower wage growth – it does suggest that profits will be squeezed by rising costs and falling prices.

The final issue is cashflow, as highlighted by the latest Dun & Bradstreet payments terms data. Payment terms are now at 55.6 days, up 8% on the December quarter. Whether companies have taken their focus off cashflow as they chase growth, or whether cashflow is really getting tighter isn’t clear, but an increase in payment terms at this stage of the business cycle isn’t great.

And that’s the point – what we are experiencing right now is a very GFC-like set of conditions, not the conditions you would expect to see as the business cycle ticks upwards.

Entrepreneurs need to be on their guard right now as the budgeting period approaches.

Constantly check and re-check your cashflow position.

Monitor stock levels carefully.

Try to hold the line on prices where possible, or at least keep discounts temporary and targeted.

And finally, start planning for various scenarios. What if rates go up another 50-basis points? What if the dollar remains high for the rest of the year? What if consumers don’t emerge from their funk for another two years? And be very, very, very conservative with your planning.