SME business conditions worsen, but entrepreneurs still looking to grow

Small to medium sized business conditions weakened considerably in the March quarter, with the NAB’s SME Business Conditions Index falling 44% to 15 points.

Consumer confidence – which has fallen sharply in recent months – remains the biggest driver of SME business activity, which could point to a worsening outlook in the coming months.

All SMEs reported deterioration in conditions in the March quarter, but large SMEs (with annual turnover between $5 million and $10 million) recorded the sharpest declines, and were the worst performing segment at 12 index points. Business conditions for mid-sized SMEs (annual turnover between $3 million and $5 million) were the highest at 18 index points, followed by small SMEs (annual turnover between $2 million and $3 million) at 16 index points.

The profit outlook index for SMEs also softened during the quarter, falling 22% to a still respectable 25 points. Small SMEs were particularly pessimistic about profits; their portion of the index crashed 65% to 14 index points.

But while SMEs are battling weaker business conditions, there is no way they are giving up on growth. According to an SME market report from banking consultancy East & Partners, 77.1% of small businesses are looking to borrow more in the next six months, despite being faced with the potential of higher rates. East & Partners’ financial markets analyst Peter Drennan says that while projected borrowing is down on previous years, it still indicates a positive business outlook.

SMEs in Victoria and to a lesser extent WA and SA reported strong business conditions in the March quarter. All three states recorded conditions above the national average. Conditions for SMEs remain weakest in NSW.

Conditions were mixed for SMEs from a sectoral point of view. The health and businesses services sectors reported the best conditions while there was a noticeable softening of conditions in the retail, wholesale and property services sectors.