Businesses urged to prepare for further volatility as new study reveals downbeat outlook
17 October 2011: Over half of Australian mid-market companies are not properly prepared for continuing fluctuations in business conditions, according to the inaugural Commonwealth Bank Future Business Index.
With one-third of businesses believing that conditions will decline over the next six months, a significant proportion of the market was also found to not have a risk, business continuity or succession plan in place.
The Index is a bi-annual analysis of the views of financial decision makers in companies with a turnover of $10m - $100m, measuring their outlook for business conditions, challenges and opportunities, projected revenue, and how prepared they are to navigate future volatile conditions.
Overall, the outlook for the next six months remains pessimistic, with the inaugural Index registering a score* of -0.3. Businesses operating in retail (-7.0), manufacturing (-8.0) and wholesale trade (-13.3) maintain the most negative outlook, with Health & Education (17.3) and Business Services (15.0) more favourably positioned as a result of heightened expectations for revenue and with preparations in place to weather a future downturn in conditions.
According to Symon Brewis-Weston, the Bank’s Executive General Manager of Corporate Financial Services, the new Index reveals a mixed picture for the Australian economy, with significant divergences not only across sectors but also States and individual business size.
“The outlook suggests that in general, mid-market companies are not confident about their position in which to weather uncertain business conditions in the near future,” said Mr Brewis-Weston.
“The general lack of confidence we are seeing may result in a low appetite for risk and capital investment over the next six months. Despite this, activity amongst Australian businesses looks set to continue to grow, albeit at a slower pace and in certain pockets of the economy. For those companies which take a proactive approach to management and planning, opportunity is still very much alive.”
Projections for revenue and profit remained relatively upbeat, with close to half of businesses (46%) expecting an increase in revenue and 40% seeing this flow through to an increase in profit. A greater proportion (49%) of larger companies with a turnover of $50m - $99m expected an increase in profit, with over half of those companies operating in the business services sector anticipating an increase in both revenue (54%) and profit (53%). Unsurprisingly, a greater proportion of the retail sector (39%) expected their profit to decrease.
Although the outlook for revenue was more favourable, this will be impacted by input costs. Over half (54%) of businesses expected an increase in salaries and wages and 53% were anticipating an increase in operating costs. Three-quarters (75%) of businesses believe that rising energy costs will impact them over the next six months, followed by rising fuel costs (66%), increases in wages (61%) and the fluctuating Australian dollar (60%).
Businesses were also clearly influenced by not only domestic factors but also issues occurring overseas.
“Perhaps surprisingly, more businesses are concerned with the economic picture in the US rather than what is taking place on our doorstep in Asia,” said Mr Brewis-Weston.
“Over half (54%) of businesses said that weak economic conditions in the United States would impact on their organisation over the next six months, compared to those who identified Asia (48%) and China specifically (47%). Economic / debt issues in Europe were of even less concern (42% of respondents).”
Approximately one-third (34%) of businesses indicated they were looking at increasing capital expenditure and just under one-third (29%) were looking at taking on extra headcount. Those companies in the Mining sector are more likely to be considering diversification, mergers and acquisitions and international expansion, with Mining and the Health & Education sectors anticipating an increase in capital expenditure, headcount and investment.
Around one-quarter (26%) of businesses said they were prepared because they had a strong financial position, while 22% said they had strategic plans in place. QLD was home to the highest proportion of businesses (52%) that were well prepared for future conditions. Of the sectors, business services were the most prepared (57% stating they were well prepared) whilst the least number of companies in the mining sector (21%) believed they were well prepared.
To minimise exposure to ongoing economic fluctuations many organisations will increase their use of hedging (particularly Manufacturers) and debt facilities for capital investment and cash flow management (particularly Mining and Transport).
With market conditions continuing their volatile behaviour, Mr Brewis-Weston points to the value of proactive planning in order to help manage what lies ahead.
“Whilst businesses seem to have put some thought on how to manage future adverse conditions, it’s clear that more work needs to be done in order to effectively protect themselves. What that means is that we will need to see an improvement in the focus businesses place on managing and dealing with financial and business risk.”
*The Commonwealth Bank Future Business Index has been calculated by taking a net balance of future business conditions, net revenue and risk as indicated by businesses with an annual turnover of $10 to $100 million.
A copy of the Future Business Index report and additional insights can be found here.
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About the Future Business Index
The Commonwealth Bank Future Business Index is based on a detailed quantitative survey of 427 financial decision-makers in public and private companies throughout Australia with turnover between $10 million and $100 million, conducted between 26th July 2011 and 15th September 2011. Conducted by ACA Research*, the Future Business Index is an indicator of what the business landscape will look like over the next six months, based on business confidence, predicted future activity and an organisation’s ability to manage fluctuating business conditions. The survey sample includes businesses from a range of sectors including Retail, Business Services, Construction, Health & Education, Information Media and Telecommunications, Manufacturing, Mining, Transport and Logistics and Wholesale Trade. The data has been weighted to reflect the latest Australian Bureau of Statistics Business Counts.
The Index seeks to identify:
- The level of confidence in business conditions over the next six months
- The challenges and threats businesses face over the next six months
- How prepared businesses are to navigate volatile conditions
- The use of financial facilities and risk planning
- Expected sources of growth and opportunities
How the Index is calculated
- The Commonwealth Bank Future Business Index has been calculated by taking a net balance of future business conditions, net revenue and risk as indicated by businesses with an annual turnover of $10 to $100 million.
- Net Business Conditions is a net balance of those that indicated that business conditions will improve minus those who see business conditions will decline.
- Net Revenue is calculated by those that see an increase in revenue of the next six months minus those that foresee a decline.
- Net Well Preparedness is a net balance of those that are Well Prepared minus those that are Somewhat and Not Well Prepared.
About ACA Research
ACA Research is a full-service market research consultancy, with particular expertise in customised business-to-business thought leadership, executive research and syndicated multi-client studies throughout Australia, New Zealand and Asia. Through a high level of business and research experience, industry expertise and focus on high-quality outputs, ACA Research effectively supports business thought leaders in their decision-making activities.