Downturn and property woes hit private businesses

The downturn has had a dramatic impact on Australia’s private businesses, according to a new report released today. The growth slowdown has forced Australia’s private businesses to take a conservative short-term outlook, change their targets, scrap produc

The grim findings are contained in the bi-annual PricewaterhouseCoopers Private Business barometer that looks at businesses with between $10 million to $100 million turnover.

It reveals a big shift in sentiment and intentions in six months, with the survey taken at the end of August. Gregory Will, PwC partner, says if the survey were held today he believes the results would be worse.

“Consumer sentiment surveys have a direct correlation with what business owners feel. They are now at historic lows, so if we did the survey today it would look worse.”

What surprised Will was the about turn in plans by Australia’s private businesses. “They are experienced business people and they have a gut feel for where they are going.”

About 57% say they have no plans to fund major investments, up from 41% in February, and the major reason was lack of credit. Two out of three responding businesses (66%) say credit is a major impediment to meeting targets in the next 12 months.

The report also says that when facing a downturn private businesses would slash costs in a number of areas. About 92% would cut their marketing spend and almost 80% would squeeze operational costs. About 30% would consider reducing staff numbers.

“That’s a warning. By cutting marketing and advertising spend, it limits you going forward. It also sends a message to your employees, suppliers and the market that you are losing confidence in the business.”

The big warning from the survey is the large reliance of business on private property. Nearly two thirds of private businesses (65%) use their family homes as security to obtain business finance. Property prices are likely to fall further, and when they do it will place greater pressure on businesses to fund the business through other means.

“Banks are smart and they do provide a buffer between the full value of the home and what they are prepared to lend, but the capacity of business owners to take on further debt is limited if house prices fall.”

Businesses have been heeding calls to pay down debt, with loan to asset ratios down to 30%. “They are seeing times are uncertain and paying down debt,” Will says. “However that is an average and some businesses have significantly higher debt. Once you get beyond 50% that puts significant pressure on the business.”

Will says he is also surprised how many businesses get their management accounts three weeks after month’s end. “To make timely decisions you need them quickly. Worst case scenario is 10 days after month’s end,” he says. “However typically people focus on sales and brand and don’t plan as much on the operational side, which means they can be making decisions on gut feel.”

Will says they see the next 12 months as being very tough. However they are confident that in three years, they will be back to growth levels they have enjoyed until now.

But Will also warned that business owners should look very carefully at their private wealth. The report found that 42% have self managed super funds.

“We thought it would be because of tax implications, but it is because they want a hands-on role in managing investments. That’s dangerous in this environment because you need effective management of your portfolios.”

The report also highlighted the vast differences in the states’ performances. Only 5% of NSW businesses and 6% of Victorian businesses exceeded set revenue targets in the past financial year. In contrast, almost all WA businesses and Queensland businesses exceeded their targets. The report also says that during the last 12 months average profits of West Australian and Queensland businesses have been growing at about six times those of counterparts in NSW and three times those in Victoria.