While Australian businesses confidence grew steadily over the past year, illion’s most recent quarterly Business Expectations report polling 1,200 business leaders shows a sharp decline of 8.3 per cent. Even though the Australian economy is strong overall, global trade conditions, structural problems, and domestic economic issues are signalling instability on the horizon for small businesses, and shaking the confidence of entrepreneurs.
A loss of confidence in the business community may, ironically, have more significant immediate consequences than the issues that are cracking the country’s previously rock-solid business sentiment. For business owners, it’s understanding how their business is affected by economic conditions, and how to react appropriately is critical.
The Australian economy is raising red flags
While the domestic economy in general is humming, there are a few issues that suggest adversity might be on the horizon. Wages have remained relatively stagnant in recent years, and housing and utilities prices have skyrocketed in many Australian cities. The result is that average Australian consumers have less money to spend on goods and services than they did in the past. While consumer spending growth has only slowed slightly, Australians now have more household debt than almost any other country in the world, with a debt to income ratio of over 200 per cent.
Some industries, particularly the retail sector, have been feeling this pressure for years now, causing many large and small retail businesses to go into administration over the past two years. While many businesses are not suffering any direct adverse effects right now, these issues are sending a signal that the economy might be vulnerable to external shocks. Unfortunately, international trade conditions may be in the process of providing that shock.
International trade rows are shaking business confidence
Two of Australia’s most important trading partners, China and the U.S., are currently engaged in a significant trade row that some journalists are already describing as a “trade war”. If the two countries don’t resolve their conflict, both economies could be seriously weakened, which would certainly impact Australian businesses that rely on business relationships with partners in those countries. Considering that, beyond these two economic behemoths, the EU, Canada, and Mexico are also involved, it could even precipitate a broader crisis.
Much of the economic growth of the past several decades has been built on increased globalisation and the relaxation of trade barriers. The implementation of new barriers seeking to roll this global economy back could have serious adverse effects on businesses. While Australia successfully avoided fallout during the global financial crisis, businesses that focus on export markets, or who have strong international relationships have a lot to lose.
Administrative issues worry small business owners
In the past year, the Australian Tax Office has taken significant action to crack down on tax underpayments, bad tax deductions, and the black cash economy. This has led to significant anxiety among small business owners, who often can’t afford the time and expense of dealing with an audit. Those who rely on cash transactions for large portions of their revenue, such as small business retailers, are particularly vulnerable.
The situation many business owners find themselves in today feels precarious. They’re facing potential difficulties from the ATO, the threat of stalling consumer spending, and the potential long term health of the larger economic environment that they operate in.
Finding the best way to react
For business owners, the question isn’t so much about how these challenges affect their confidence, but rather how they’ll react to it. While some pressure is mounting on SMEs, it’s also easing off in other areas. In the past year, late payment times have been reduced significantly, and many of the country’s largest corporations have signed on to the Australian Supplier Payment Code. Better yet, in the past year Australian SMEs reported their highest growth figures since 2014.
Businesses can and do establish themselves, grow, and compete in all conditions. As those conditions change in different industries and across the economy, the businesses that adapt best outcompete those who simply lose confidence. Most often, the signal for those changes come in the form of cash flow interruptions. The first red flag a business owner might actually see is often a drop in sales, or a letter from the ATO. A business that primarily used their alternative financing resources to manage late payments in the past, might now instead focus on offsetting the costs of an unexpected audit.
Successful businesses don’t rely on perfect conditions to succeed. Instead, they creatively work with the situation that they find themselves in. By doing so successfully even when there are dark clouds on the horizon, businesses can develop the resiliency and flexibility they’ll need to stand the test of time against their competitors for years to come.