With increasing interest rates, fluctuating petrol prices, drought, lagging trade payments, and the credit crunch, planning for business challenges is a must for SME survival. Here’s your guide to expected business hardships, together with some expert advice to ease business conditions.
Blow after blow has been dealt to SMEs, everything from a strengthening Aussie dollar, to the climate change debate—most of which were completely unexpected. So take a forward look at what awaits businesses this year, and create a business plan to keep yourself from being knocked out.
With more interest rate rises expected, it is not surprising that business owners are uneasy. Dun & Bradstreet’s September and October Business Expectations Survey revealed interest rates are seen as the most influential pressure on business in the upcoming quarter, by 36 percent of executives, with interest rate concerns at their highest in two years. “It is evident that rates will remain a key concern for SMEs in 2008,” says Christine Christian, Dun & Bradstreet Australia CEO.
One option available to small businesses, to protect themselves from further interest rate rises, is either full or split fixing loans. And with most financial institutions not charging additional costs to fix loans, it’s an increasingly appealing option.
“Businesses will also be affected by the tightening of credit that has resulted from the US sub-prime fallout. SMEs will find credit harder to access and more expensive,” says Christian. Delayed trade payments are expected to increase as a result. “SMEs could see considerably reduced business cash flow and impacts to resources, as staff are required to recover overdue amounts or are pushed to increase sales to make up the shortfall.”
Trade, Export & the Aussie Dollar
SMEs make up almost 90 percent of Australian exporters, according to the Australian Bureau of Statistics (ABS). What can they expect in the coming year?
“In 2008, we are likely to see the major capital investments in the resources sector come through into the export data, so if you think the resource export numbers are big now, you ain’t seen nothing yet,” says Tim Harcourt, Austrade’s Chief Economist.
But while the resources boom continues, agriculture and manufacturing exporters will be constrained by the ongoing drought and infrastructure hold-ups.
Also concerning, especially for exporters, is the Australian dollar which is at its strongest since the 1980s, surpassing 90 cents in October. “It’s not at all good to see our Australian dollar getting stronger and stronger. It makes it that much harder to be competitive,” says Martin Brook, co-founder of Brookfarm, gourmet food manufacturing company. “We’re actually beginning to hedge currency.” Despite the rise, Brook is adamant they will maintain the quality levels of their exports.
“The majority of out exporters don’t let fluctuations in exchange rates ruin their business plans,” says Harcourt. “They see the moving exchange rate as a fact of life of operating in the global economy and make their decisions based on long-term plans and building strong relationships with clients, customers and business partners.”
So the future is not so glum, but future plans should take into account infrastructure and skilled labour shortages.
An Australian Institute of Management (AIM) survey found 51 percent of senior managers believe the skills shortage is the greatest risk to their business. Not surprisingly, staff retention has become a necessity, and the number of part-time workers has risen to form one-third of the Australian workforce.
“For employers to solve the existing employment shortfall it is important for them to explore part-time, job share and flexible employment options. They should look to target sections of society that have traditionally been neglected by employers,” says Liana Gorman, Part Time Online director. “Offering this potential workforce flexible working conditions to suit their lifestyle, will help alleviate employee vacancies in all skill areas and help retain staff in the longer term.”
Staffing solutions are not always difficult. Like other SMEs, Brook finds hiring the right staff to be a challenge, but unlike others, he has little trouble retaining staff. “Our goal was to create an environment where people really wanted to come and work with you. Also a very empowering environment where people may come and start at the bottom, but we work with people to bring them up in the organisation,” he explains. “We really want that feedback from the people who are at the coalface doing the job everyday. And the other thing is really valuing the people who come to work with us.” Creating relationships with staff, based on trust, is an important retention tool. Both business and business owner will benefit.
Outsourcing is also a useful staffing option. Doing everything yourself will only leave you burnt out, especially in areas you don’t have experience, including PR, marketing, advertising and accounting. Trust others to pick up some of the slack.
Importance of Client Relations
Keep clients satisfied, and watch the success of your business grow. Brookfarm has an individual follow-up system for this reason. “Our customers are an integral part of our business,” says Brook. “We don’t have those systems where people press buttons to talk to machines. We have direct contact with our customers”
For Brookfarm, providing quality products, at the guaranteed time, ensures customers are left with a good impression, and results in return business. Understanding what customers really want is essential, and the necessary tool can be as simple as a survey.
Finding out your ranking in comparison to the competition, and making changes to your service if necessary, will also help. A major contributor to business failures is a lack of understanding when it comes to client relations and the competition. “Ninety-nine percent of businesses are still unable to compare key performance components of their business with direct competitors and make critical alterations to make decisions accordingly. The result is tens of thousands of businesses still fail in Australia each year,” says Chris Russell, Business Reporting Bureau CEO.
Planning for Business Survival
With so many unpredictabilities in the business environment SMEs need to firmly manage the little they can control. “This means putting in place solid cash flow, receivables management and risk mitigation processes.
“SMEs should delay outlays for as long as possible while encouraging anyone who owes money to pay as rapidly as possible,” says Christian.
Prompt payment requirements include a solid receivables management function that provides clear credit terms, tracks customer payments, and acts against debtors.
“In addition, SMEs should implement simple credit checking processes to ensure they have a thorough understanding of the financial health of their customers. This includes an awareness of customers’ ability and propensity to pay on time,” explains Christian.
“Having a complete picture of business incomings and outgoings, and understanding customers’ financial health will be the key to SME survival in 2008.”
If necessary, enlist the help of a financial advisor to ensure you do have the complete picture, but makes sure you get started today. Create a solid plan to face these factors head-on. And while you should review 2007, don’t dwell on it. SMEs can all learn from Percy Bysshe Shelley; “Fear not from the future, weep not for the past.”
Setting Business Goals
With the New Year comes a brief period of quiet, as the population collectively sighs in relief. It’s all over; at least it is for another year. And this time of year offers the perfect opportunity to look closely at the business and where it’s headed. Use this time to take stock of the year that was, and set solid and achievable goals for the year ahead.
But why is it essential to set goals? “Setting goals is an important initial part of the business planning process,” says Gavan Ord, CPA Australia business policy advisor. “Goals help to clarify what business owners want to achieve and also set the climate for a business plan.”
Reaping the benefits of having a well thought-out plan is Martin Brook, co-founder of Brookfarm, gourmet food manufacturing. Having recently won a Telstra Business of the Year Award, Brook believes it takes serious planning to manage a business and its growth. “Planning is just an integral part of our business. We all need to know how we’re going to get to our destination,” says Brook. “It’s up to us to create this roadmap and then bring everyone else along on the journey.” And he does appear to be on the right path. “We are growing so quickly we have to continually review our business plan, and adapt to the circumstances that we find ourselves in due to our expansion,” he explains. “We review our business plan every six months.”
Frequent reviews are productive, especially when it comes to the budget. While budgeting isn’t everything, it does draw the boundaries of your business’s capabilities, so you’ll want to make sure it’s on track. Ord advises start-ups to review their budget monthly. “Or if a business is going through cash flow problems, you might want to look at your budget more regularly than once a month,” he adds. “After two or three years, you might review it every six months, or every year.”
With 40 percent of business owners planning to leave their business in the next four to five years, a succession plan is also vital, says Ord. “There seems to be a lot of business owners heading toward the question of whether they’re going to remain in business or retire. If you have a succession plan, you’re obviously one step ahead of people who don’t.”
According to CPA Australia’s Small Business Successions and Exits survey, only 10 percent of SMEs took over their family’s business. The remaining 30 percent took over another established business, and the remaining majority of 60 percent started a new business. “It may be a two or three year process to prepare your business for a sale or transfer.”
Careful planning again helps if you intend to apply for any financing to increase your business boundaries. “A business plan with clear goals is often an important factor in decision making for potential investors and banks,” says Ord.
So what are the steps to create this helpful plan? “The first step is to determine why you’re in the business, the second is to set the goals to meet your objective, and the third is to put in place the strategy,” explains Ord.
Goals will ensure your business resources are focused, to provide you the best results. However remember, your goals should focus on more than just the budget and finances. Whether you’re planning your staffing, client relations, or approaches to new legislation, first review the results of the previous year, and work towards learning from your mistakes.
We are all familiar with the maxim; those who ignore the mistakes of history are doomed to repeat them. Avoid a forecast of gloom and doom for 2008 by reviewing 2007.
Not unpredictably, according to Christine Christian, Dun & Bradstreet Australia CEO, interest rate rises topped the list of SME concerns in 2007, and still more rate rises are expected in 2008.
While SMEs were also affected by increased petrol prices, the year saw a drop in the number of businesses negatively affected from 67 percent to 58 percent.
A drop in businesses affected by the drought was also recorded, and now only a quarter of businesses feel the negative impact.
SMEs saw the effects of lagging business-to-business trade payments in 2007, with most payments taking three weeks more than the standard payment term, says Christian. Most failure to pay cases recorded by Dun & Bradstreet were for amounts less than $400, but these small payment evasions can add up to be big for SMEs.
Last, but not least, the credit crunch. Access to credit became, and will continue to be more difficult for SMEs, says Christian. Exporters in particular will suffer as Asia-Pacific trade partners feel the crunch and their importing capabilities drop off.
SME business confidence is on the rise since last year, according to the Sensis business index for August 2007. The reasons behind this newfound confidence are good demand, and a trust that current economic conditions will continue. But governmental uncertainties and blame shifting, along with rising interest rates, decreased business in certain industries, and increased competition, might change this upward confidence.
So what does the future hold?
For starters, a rise in part-time work. With three million Australians currently working part-time, this section of the workforce is not longer made of just students, mothers and retirees. “Given the flexibility and reduced costs for employers, we expect part-time employment to continue to grow,” says Jason Baker, IBISWorld Australia general manager.
Also expected to rise is the unemployment rate. “We are expecting a rise in unemployment from around 2009 to 2010 and onwards due to a forecast slowdown in the domestic economy, increasing worker productivity, with fewer employees required to perform the same tasks, and globalisation of the workforce, which may see more jobs lost to lower cost workforces in Asia and potentially Africa over the long term.”
Finally, an increase of workers between 55 and 64 remaining in the workforce, and an increase of females workers aged between 45 and 54 is expected. Both increases are needed for the economy to cope with Australia’s ageing population.
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