Presented by FUTURE OF BUSINESS

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1 Presented by Economy and Finance Report July 2014

2 Contents Contents Methodology 3 Executive Summary 4 Firmographics 6 Sample Profile 7 Economy & Finance 10 Economic & Business Growth 11 Revenue & Profit 12 Other Challenges 13 Cash Flow 14 Business Financing 16 Revenue 18 µ bankwest.com.au/connect

3 Methodology Methodology This report has been prepared by CoreData on behalf of Bankwest. The research was conducted between April 10th and April 17th, 2014 via an online quantitative survey of approximately questions, developed and hosted by CoreData. CoreData s proprietary panel of more than 132,000 Australian consumers was used to canvass the views of a specific target market business leaders. The sample is comprised of 85 respondents, including those in C-suite and senior management positions within mid-size businesses. The targeted businesses met the following criteria: o o Minimum annual turnover of $1 million From the following industries: Agriculture and forestry, education and training, retail trade, professional services, light manufacturing, wholesale trade, financial and insurance services, property & business services, franchising, pharmaceuticals and transport See Appendix for further details of sample characteristics. Presented by 3

4 Executive Summary µ bankwest.com.au/connect

5 Executive Summary Executive Summary Bullish expectations for medium term economic growth and business conditions While leaders of mid-sized businesses share mixed expectations about growth in the Australian economy over the next 12 months, three in five (60.0%) expect the Australian economy to speed up in the next five years, while only one in five (22.3%) expects a slowdown. Expectations for domestic business conditions are likewise bullish over the medium term. Over five years, more than three in five (63.5%) business leaders expect conditions to improve while only 16.5% expect conditions to deteriorate. New products/services and expansion on the horizon to overcome cash flow challenges Diversification through products/services and markets are the most common ways in which respondents will deal with future challenges to cash flow. The majority of leaders cite offering new products/services as the likely solution in both the next 12 months (51.9%) and in the next five years (57.0%). More than two in five (44.3%) intend to expand into new markets in the next 12 months and almost half (49.4%) say they will likely do this in the next five years. Operating costs a challenge for most mid-sized businesses in short and medium term The majority of respondents cite increased operating costs as the biggest challenge to the cash flow of their business in the next 12 months (55.3%) and in the next five years (52.9%). Over 12 months, the next biggest challenges to cash flow are reduced revenue (40.0%), losing a key customer (35.3%) and new or increased competition (34.1%). Over five years the next biggest challenges are reduced revenue (41.2%), new or increased competition (40.0%) and government red tape (38.8%). Growth businesses and market leaders more likely to increase borrowings in short and medium term More than two in five (43.5%) business leaders plan to maintain or increase their current level of borrowing over the next 12 months, while nearly half (48.3%) plan to maintain or increase their borrowing over the next five years. Business maturity has a considerable impact on the likelihood to increase business finance. Appetite for borrowing more is higher among businesses in the growth* phase than the mature** phase in the next 12 months (20.6% vs. 11.8%) and in the next five years (29.4% vs. 7.8%). Respondents who consider their business to be the market leader are considerably more likely to take on risk when it comes to borrowing, with close to one in four likely to borrow more in both the next 12 months and in the next five years (both 24.1%). In comparison, only one in 10 respondents who say their business is not the market leader intend to borrow more over the next 12 months and five years (9.7% and 12.9% respectively). Businesses planning to borrow money in the next 12 months are most likely to be seeking funding for growth (45.9%). In comparison, only three in 10 are seeking funding for working capital (29.5%) and a minority are intending to pay down an existing loan (14.8%). Strong medium term revenue buoyed by product innovation The optimistic views of mid-sized businesses on economic growth and business conditions are reflected in their revenue expectations. While the majority (53.0%) of respondents expect their business revenue to increase over the next 12 months, revenue expectations are considerably stronger over the next five years, with seven in 10 (70.6%) expecting business revenue to increase in the medium term. New product development is the leading source of revenue growth for mid-sized businesses, with close to three in five (59.3%) respondents citing this as the driver of revenue growth. *Growth phase refers to respondents who answered growth, expansion or start-up to the question: How would you best describe the stage of the business life cycle that the business you work in is at currently? ** Mature phase refers to respondents who answered mature or established to the same question. Presented by 5

6 Firmographics µ bankwest.com.au/connect

7 Firmographics Firmographics Sample Profile Which one of these best describes the business you work in? % Proprietary company Partnership Sole trader Public listed company Trust The majority (55.3%) of respondents are from proprietary companies. A minority work in a partnership (15.3%), are sole traders or work in a public listed company (both 10.6%) or work in trusts (8.2%). The majority (55.4%) of respondents say their business has an annual turnover of more than $5 million, while around one in three (34.1%) have businesses with an annual turnover of between $1 million and $5 million. In broad terms, what is the annual turnover of the business you work in? $1 million to less than $5 million 34.1 $5 million to less than $10 million 16.5 $10 million to less than $15 million 17.6 $15 million to less than $20 million 2.4 $20 million to less than $25 million 2.4 More than $25 million 16.5 Rather not say % Presented by 7

8 Firmographics In which of the following states/territories does the business you work in operate? % Yes ACT NSW NT QLD SA TAS VIC WA National operations Respondents are most likely to have business operations in the major eastern states of NSW (29.4%) and Victoria (27.1%), followed by South Australia (17.6%) and Queensland (12.9%). Some 15.3% work in businesses with national operations. Three in ten (30.9%) respondents have less than 10 people in their business, while almost one quarter (23.5%) have between 21 and 50 and one in five (21.0%) have more than 100 employees. Including yourself, approx. how many people are employed by the business you work in? Less than to to to More than % How would you best describe the stage of the business life cycle that the business you work in is at currently? (Please refer to the appendix for the definition of terms) Growth 17.6% Expansion 18.8% Mature 23.5% Start- up 3.5% Established 36.5% µ bankwest.com.au/connect

9 Firmographics More than one third of mid-sized businesses focused on growth Nearly one in five (18.8%) respondents say their business is in the expansion phase of the business life cycle, meaning their business is looking to develop through growth into new markets and distribution channels. A further 17.6% say their business is in the growth phase, where revenues and client numbers are increasing and profits are strong, although competition is surfacing. Some 36.5% of respondents are from established businesses which have matured into thriving companies with a place in the market and a loyal following of clients. Close to one in four (23.5%) say that their business is mature with year-on-year sales and profits tending to be stable and competition remaining fierce. Few respondents say their business is in the early life cycle start-up phase (3.5%). Do you believe the business you work in is the market leader in your industry? % 20 0 Yes our business is the market leader No our business is, No our business is not however, close to being the market leader the market leader 2.4 No our business is newly established One third of mid-sized businesses in market leading position More than one in three (34.1%) respondents claim their business is the market leader in their industry, with a further 27.1% saying their business is close to being the market leader in their industry. However more than one third (36.5%) say their business is not the market leader, while 2.4% are from newly-established start-ups. Presented by 9

10 Economy & Finance µ bankwest.com.au/connect

11 Economy & Finance Economy & Finance Economic & Business Growth Bullish expectations for medium term economic growth While business leaders share mixed expectations on growth in the Australian economy over the next 12 months, with 36.4% expecting it to slow down, 29.4% expecting it to speed up, and 32.9% expecting no change, medium term expectations are bullish. Three in five (60.0%) expect the Australian economy to speed up in the next five years, while only one in five (22.3%) expect a slowdown. Do you think the Australian economy will grow at a slower or faster rate over the next... Slow down a lot Slow down slightly No change Speed up slightly Speed up a lot Not sure months 5 years % Do you think business conditions in Australia will be better or worse over the next... Much worse Somewhat worse Neither worse nor better Somewhat better Much better Not sure months 5 years % Business conditions expected to improve in medium term Expectations of respondents on domestic business conditions follow a similar pattern to their expectations on wider economic growth, with polarisation in the short term but a majority holding positive expectations for the future. Close to two in five (38.8%) respondents expect worse business conditions in the next 12 months, while three in 10 (29.4%) expect better conditions. However, expectations over the longer term of five years are strong, with 63.5% expecting conditions to improve, compared to only 16.5% of respondents that expect conditions to deteriorate. Presented by 11

12 Economy & Finance Revenue and Profit To what extent would the following potential challenges impact the revenue and profitability of the business you work in over the next 12 months? 100% Strong impact Moderate impact Minimal impact No impact Not sure 80% % 40% 20% 0% Changes in government regulations 37.6 Uncertain economic conditions in Australia Competition from overseas firms (i.e. imports) Unpredictable levels of consumer spending Variable costs of input materials Uncertain economic conditions globally Competition from local firms Volatility in financial markets, including credit markets Domestic economic uncertainty to have strongest impact on medium term revenue/profits There are a number of challenges that would impact on mid-sized businesses in the next 12 months, with government regulation and economic uncertainty considered by respondents the challenges that would have the strongest impact on the revenue and profitability of their business. Some 37.6% of respondents say changes in government regulation would have a strong impact on their business, while a similar proportion (36.5%) list uncertain economic conditions in Australia as likely to have a strong impact. Competition from overseas firms is also a key potential challenge for mid-size businesses, with almost one third (32.9%) citing this as a factor that would have a strong impact on revenue and profitability. In the longer term of five years, uncertain economic conditions in Australia and changes in government regulations are expected to have the strongest impact on revenue and profits (37.6% and 36.5% respectively), followed by unpredictable levels of consumer spending (31.8%). To what extent would the following potential challenges impact the revenue and profitability of the business you work in over the next 5 years? 100% 80% Strong impact Moderate impact Minimal impact No impact Not sure % 40% 20% 0% Uncertain economic conditions in Australia Uncertain Volatility in economic financial markets, conditions globally including credit markets Changes in government regulations Unpredictable levels of consumer spending 24.7 Variable costs of input materials Competition from local firms Competition from overseas firms (i.e. imports) µ bankwest.com.au/connect

13 Economy & Finance Other challenges Other potential challenges that could impact the revenue and profitability varied among respondents. Costs of employment. Director, Works in Light Manufacturing industry, Business is growing. Debt levels of clients. Head of Department, Works in Financial and Insurance Services industry, Business is established. Employee statuses. Business Owner / Self Employed, Works in Pharmaceuticals industry, Business is established. Employees moving on. Head of Department, Works in Agriculture and Forestry industry, Business is mature. Greater supply of products. General Manager, Works in Financial and Insurance Services industry, Business is established. Health of Principals Business Owner / Self Employed, Works in Financial and Insurance Services industry, Business is established. Insourcing and offshoring of the services I offer. Director, Works in Professional Services industry, Business is expanding. Internet shoppers. Business Owner / Self Employed, Works in Financial and Insurance Services industry, Business is established. Labour market. Head of Department, Works in Light Manufacturing industry, Business is established. Workers compensation costs. Business Owner / Self Employed, Works in Light Manufacturing industry, Business is established. Presented by 13

14 Economy & Finance Cash Flow From a cash flow perspective, what do you perceive to be the biggest challenges to the business you work in over the next... Increased operating costs Reduced revenue Losing a key customer New or increased competition Declining margins Government red tape Compliance and tax administration Delays in your clients/customers paying invoices Tax bills Losing a key debtor due to insolvency Writing off bad debts Higher cost of credit Limited access to credit Multi-speed economy Suppliers reducing their payment terms I do not perceive any challenges to cash flow Other months 5 years % Yes *Multiple answers allowed Operating costs a challenge for most mid-sized businesses in short and medium term Increased operating costs is the number one challenge facing mid-sized businesses from a cash flow perspective in both the short and medium term. The majority of respondents cite increased operating costs as the biggest challenge to the cash flow of their business in the next 12 months (55.3%) and in the next five years (52.9%). Over 12 months, the next biggest challenges to cash flow are reduced revenue (40.0%), losing a key customer (35.3%) and new or increased competition (34.1%). Over five years the next biggest challenges are reduced revenue (41.2%), new or increased competition (40.0%) and government red tape (38.8%). Only 7.1% of respondents do not perceive any challenges to their business cash flow in the next 12 months, while only 5.9% do not expect challenges in the next five years. µ bankwest.com.au/connect

15 Economy & Finance Cash Flow Which of the following are you likely to consider to overcome these challenges to cash flow in the next...? Offering new products/services Expanding into new markets Cash flow forecasts A periodic cash flow health check with an accountant or adviser Credit checks on new clients/customers Spending more time chasing invoices Taking out or increasing an overdraft Offering discounts for early payment Increasing the frequency of invoicing (i.e. daily rather than weekly) months 5 years Other % Yes *Multiple answers allowed New products/services and expansion on the horizon When asked how they would likely deal with challenges to cash flow in the future, the majority of respondents cited offering new products/services in both the next 12 months (51.9%) and in the next five years (57.0%). More than two in five (44.3%) intend to expand into new markets in the next 12 months and almost half (49.4%) say they will likely do this in the next five years. More than one in three intend to rely on cash flow forecasts in both the short and medium term (35.4% and 36.7% respectively). Credit checks and chasing invoices are both strategies that mid-sized businesses are more likely to employ in the short term, while new products and market expansion are more commonly cited as strategies for the next five years than the next 12 months. Presented by 15

16 Economy & Finance Business Financing What are the intentions of the business in which you work in relation to borrowing money in the next? % months 5 years Will not borrow at all Will borrow less Will borrow the same Will borrow more Not sure Growth businesses more likely to increase borrowings in short and medium term While there is little appetite for increasing borrowing in both the short and medium term, one in three businesses say they are likely to match their current level of borrowing in both the short and medium term of 12 months (28.2%) and five years (31.8%). Over the next 12 months, slightly more than one in five (21.2%) intend to borrow less, while 15.3% will borrow more. Over the next five years, businesses are slightly more likely to say that they intend to borrow more (16.5%) than to borrow less (14.1%). Business maturity has a considerable impact on the likelihood to increase business finance. Appetite for borrowing more is higher among businesses in the growth* phase than the mature** phase in the next 12 months (20.6% vs. 11.8%) and in the next five years (29.4% vs. 7.8%). Market leaders more likely to borrow more Respondents who consider their business to be the market leader are considerably more likely to take on risk when it comes to borrowing, with close to one in four likely to borrow more in both the next 12 months and in the next five years (both 24.1%). In comparison, only one in 10 respondents who say their business is not the market leader intend to borrow more over the next 12 months and five years (9.7% and 12.9% respectively). *Growth phase refers to respondents who answered growth, expansion or start-up to the question: How would you best describe the stage of the business life cycle that the business you work in is at currently? ** Mature phase refers to respondents who answered mature or established to the same question. µ bankwest.com.au/connect

17 Economy & Finance Which of the following best describes the way in which you intend to use the money you will borrow over the next? Will seek funding for growth Will seek funding for working capital Will pay down an existing loan Will refinance existing debt Will seek funding for a merger or acquisition None of the above Other months 5 years *Multiple answers allowed % Yes Funding for growth primary reason for borrowing Businesses which will borrow money in the next 12 months are most likely to be seeking funding for growth (45.9%). Close to three in 10 are seeking funding for working capital (29.5%) and a minority are intending to pay down an existing loan (14.8%). Over five years, funding for growth is also the most popular reason to access business finance (36.5%), followed by paying down an existing loan (27.0%) and funding for working capital (22.2%). Intention to expand among businesses is also evident over the medium term with more than one in five (22.2%) borrowing to fund a merger or acquisition. Presented by 17

18 Economy & Finance Revenue Taking into consideration all the challenges discussed previously, as well as your views on the economy and business conditions, what are your revenue expectations for the business in which you work over the next? Decrease between 11% and 20% 1.2 Decrease between 1 and 10% Stay the same Increase between 1% and 10% Increase between 11% and 20% Increase by more than 20% Not sure months 5 years n = 85 % Stronger medium term revenue expectations Mid-size businesses are optimistic about revenue growth in both the short and medium term. The majority (53.0%) of respondents expect business revenue to increase over the next 12 months, with close to two in five (38.8%) expecting a slight increase of between 1% and 10%, and 7.1% respectively expecting an increase of 11% to 20% and an increase of more than 20%. Close to one in five (17.6%) expect revenue to decrease marginally (between 1% and 10%), while one in four (25.9%) expect it to stay the same. Revenue expectations are even stronger over the next five years with seven in 10 (70.6%) respondents expecting business revenue to increase in the medium term. Only 15.3% expect revenue to stay the same, while an even smaller proportion expect a decline in revenue (5.9%). Growth businesses are more optimistic than mature businesses. Close to two in three (64.7%) respondents with businesses in the growth phase are expecting revenue to increase in the next 12 months, compared to only 45.1% of those in the mature phase. µ bankwest.com.au/connect

19 Economy & Finance Where do you expect this revenue growth to come from? New product development More effort put into client development Natural growth in the market Pricing strategies 44.1 Increased productivity 37.3 Word of mouth Traditional advertising/marketing activities New distribution channels Social media marketing Weaker competitors Acquiring a business (vertical integration) Acquiring a business (horizontal integration) Acquiring a business (unrelated to current business) Selling off assets Other *Multiple answers allowed % Yes Product innovation to drive revenue growth New product development is the leading source of future revenue growth for mid-sized businesses, with close to three in five (59.3%) respondents citing this as the source of future revenue growth. Close to half of respondents attribute growth to client development efforts and natural growth (both 49.2%), while 44.1% say pricing strategies will drive revenue growth in their business. For respondents who expect their business to experience a decline in revenue, the most commonly cited measure to counteract this is to rely on pricing strategies (47.4%), followed by client development (26.3%). Presented by 19

20 Presented by π µ bankwest.com.au/connect The information contained in this publication is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this publication without first obtaining specific professional advice. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN AFSL/Australian credit licence , its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this publication.