The Bibby Barometer of Small Business Insight into the biggest concerns of small business owners SEPTEMBER 2011 highlights Business stress More than half of small business proprietors are more stressed now than they were a year ago FEATURE Stress levels rise, but Australia s small business owners remain optimistic Managing cash flow is the single greatest headache in running a small business Bank borrowings The majority of surveyed SMEs feel that their bank requires too much security for borrowings or overdrafts Do payment incentives work? More than half offer early payment incentives; 64% regard them as effective, but surprisingly 30% say they are ineffective SME resilience The research reveals one in five small businesses would be likely to become insolvent if they lost their largest two suppliers A message from Greg Charlwood, Managing Director, Bibby Financial Services Australia Australia s small and medium sized enterprises (SMEs) are still doing it tough and many are contending with late payments and limited access to funding. These are the key findings from our new study, the Bibby Barometer, conducted on over 200 small businesses in Australia (excluding the retail sector) at the end of June 2011. Carried out by Galaxy Research, the survey looks at stress levels, headaches and issues confronting small businesses, and aims to provide unique insights into the pressures faced by small businesses. For the purpose of the study, small businesses were classified as those between 5 and 19 employees. According to the Barometer, business confidence still remains fragile and SMEs are contending with rising interest rates, reduced consumer spending, increased staff wages and increasing fuel costs. The combinations of these factors suggest tough economic conditions in the future for small businesses. Despite challenges ahead, the survey found most small businesses remain optimistic due to their entrepreneurial nature. Following are the results from the Bibby Barometer. Late payments Almost one in two small business decision makers report that they have experienced overdue customer payments in the past 12 months The study found 52% of those surveyed felt they were more stressed now than 12 months ago. Only 17% reported less stress. The largest single source of stress was managing cash flow having enough money coming into the business, together with back-up funding, to ensure they could pay staff and other expenses on time. The study indicated that stresses have gained pace in manufacturing and professional services more than any other industry sector in the past 12 months. The Bibby Barometer of Small business PAGE 1
Small business proprietors are optimistic and 71% are confident about the prospects over the coming 12 months. This is reassuring, as small businesses are the growth engine of our economy and the sector that employs the most Australians. Greg Charlwood Small business stress levels increasing 52% More stressed than a year ago 17% Less stressed than a year ago 30% About the same Significant headaches in running a business 49% Managing cash flow 44% Staffing issues 39% Difficult market conditions 30% Gov red tape, compliance & tax admin 38% Lack of family time 12% Import/export/exchange rate problems 25% Access to business finance 17% Managing supply chain & sales Almost half of the respondents (49%) in the research indicated cash flow as their biggest headache. This is closely followed by staffing issues. Three issues vied for third place among the most significant headaches: difficult market conditions, government red tape (compliance and tax administration), and lack of time to enjoy family life. Staffing was more likely to be a source of stress for companies with annual turnover of $1 million or more (51%) than with those earning under $1 million (39%). Optimism about growth, despite the challenges Despite the challenges they face, half the proprietors surveyed report their businesses are growing. A further 29% are faring just as well now as 12 months ago, but 21% are contracting. Almost two thirds expect strong to moderate sales growth over the coming 12 months. In contrast, only 10% are pessimistic and expect a decline. The most optimistic sectors are manufacturing and professional services, with wholesale, trade and transport businesses more pessimistic. A strategy for growth will prompt 33% to invest further in their business in the next 12 months, the Bibby Barometer indicates. These upbeat decision makers outnumber those looking to sell off assets by two to one. The perils of uncertain cash flow The precarious nature of small business is demonstrated in the finding that one in five (21%) would be likely to become insolvent if they lost their two largest customers, or their two largest suppliers converted them to cash-on-delivery status. A further 43% believe they would be forced to downsize if they lost their two largest customers, or their two largest suppliers put them on cash-on-delivery status. Only 27% are confident that they could take the tightening of cash flow that would eventuate in their stride. Payment delays the outlook is grim A key contributing factor to the cash flow problem is the length of time that small businesses must wait to be paid, with 47% experiencing delays compared with 12 months ago. Many small business decision makers remain pessimistic about payment terms with 38% expecting the length of time to be paid to increase further this quarter. Almost one in two small business decision makers (47%) report that they have experienced overdue customer payments in the past 12 months. As many as 42% feel that their customers are resorting to excuses for such slow payments, while 31% report that they must wait longer to be paid, due to payment terms having been extended. Late payment proprietors biggest headache Proprietors optimism about the future prevails despite their biggest headache, cash flow, worsening for many of them. The main reason for this is that the payments situation has degenerated. 47% now wait longer to be paid for the The Bibby Barometer of Small business PAGE 2
The precarious nature of small business is demonstrated in the finding that one in five (21%) would be likely to become insolvent if they lost their two largest customers, or their two largest suppliers converted them to cash-on-delivery status. goods and services they have sold than they waited at this time last year. Only 8% enjoy more prompt payment. Those with large customers have added headaches For small businesses dealing with big companies and government clients the three most frustrating experiences are: 1. slow payment (52%) 2. the need to comply with complex invoicing procedures (27%) and 3. being able to find someone that can resolve invoicing problems quickly (23%). Cash flow situation 50% More difficult to manage than 12 months ago 25.5% Less difficult High sensitivity to bad debts In addition to slow payment, small businesses must also contend with nonpayment, with 24% having experienced bad debt in the past 12 months. The consequence of these payment issues is that 25% of small businesses have experienced a serious cash flow in the past 12 months and 24% reported difficulty in meeting liabilities on time due to cash flow issues. For more than three quarters (79%) of small businesses, a bad debt of just 5% of annual turnover would have a significant impact on their profitability. Companies with between 10 and 19 employees and those with higher turnover are more likely to experience a significant impact in the event of bad debt. How small businesses are faring now, compared with 12 months ago 9% Growing strongly 41% Growing 29% No change 13% Contracting 26.5% No change INTEGRAL COLLECTIONS Integral Collections are a subsidiary of Bibby Financial Services specialising in business to business debt recovery for SMEs. For more information, visit integralcollections.com.au Growing interest in alternative sources of funding to bank finance Since the onset of the Global Financial Crisis, a quarter of small businesses (24%) have considered debtor finance as a way to manage cash flow. A similar proportion has investigated credit from sources other than banks. Firms most likely to consider debtor finance are those with: 10 to 19 employees (31%) 3% Contracting significantly 5% Barely surviving annual turnover of $1 million or more (31%). Around one in three small business decision makers (31%) have business borrowings secured against their property. And they are not happy campers: The majority (62%) feels their bank requires too much security for their borrowings or overdrafts. The Bibby Barometer of Small business PAGE 3
The consequence of these payment issues is that 25% of small businesses have experienced a serious cash flow in the past 12 months 22% feel that the bank s requirements are excessive. Of small businesses with 10-19 employees and those with a turnover of $1 million or more, 72% are particularly likely to feel that banks require too much security. In the event that their company s funding limit was reduced by 20%, almost a third (32%) of decision makers indicate that the impact on them would be significant. Effectiveness of discounts for prompt payment of invoices 14% Very effective 50% Somewhat effective 25% Somewhat ineffective 6% Very ineffective Intentions for the coming 12 months 33% Investing in the business for future growth 54% Maintaining current level of investment in the business 16% Selling off assets Confidence in business prospects over the next 12 months 18% Very confident 53% Somewhat confident 21% Somewhat unconfident 5% Very unconfident 39% are not confident that they would have access to the additional funding they would need if they had a sudden growth spurt or won large contracts. To alleviate cash flow problems many small business decision makers admit they have needed to access personal savings (46%) or take out an overdraft (38%). Are incentives for early payment effective? The majority of small businesses (52%) offer early settlement discounts to their customers to encourage prompt payment. The most common discount is in the range of 1-4%, although higher incentives can be found, particularly in the hospitality, education and training sector and among professional services. Surprisingly, 30% of those that offer early settlement discounts find them to be ineffective in encouraging the prompt payment of invoices. Wholesalers, trades people and transport businesses are the most disheartened by their experience, with 41% regarding incentives as ineffective. Among the 68% that regard incentives as worthwhile, only 14% say they are very effective. These tend to be in the manufacturing or professional services sectors. The types and uses of funding that SMEs will require Funding will continue to be an issue for small business decision makers over the next 12 months, with 21% intending to seek new funding for growth and 19% looking for funding to provide working capital. While 34% will be looking to pay down an existing loan, 20% intend to refinance existing debt. The key challenges ahead As well as being the biggest headache, cash flow also is considered the main obstacle to expansion according to 22% of small business decision makers. The next growth hurdle is staffing (19%), followed by sales capacity (17%). The main challenges for small businesses in the months ahead are: rising interest rates (30%) reduced consumer spending (30%) increased staff wages (29%) and increasing fuel costs (28%). The combination of these factors suggest tough economic conditions for small businesses will place even greater pressure on cash flow management well into 2012, despite their optimistic outlook. The Bibby Barometer of Small business PAGE 4
How to protect your business against greater stress: questions every business proprietor should consider How dependent is your business on a few large customers? Could your business cash flow withstand the loss of one of them? If your financing facilities were suddenly withdrawn or reduced, what would be your most likely refinancing option? If you offer customers discounts for early settlement of their accounts, what is this costing your business? Are the discounts effective? If you could accelerate cash flow through faster payment of the invoices you issue, could you take advantage of any early payment discounts that your clients offer? Would this saving be significant? How efficient are your invoice issuing and follow up and collection processes? With average payment times now more than twice the standard 30 days or longer for some companies, do you need to put more effort into being paid on time? How much time could you devote to negotiating settlements with bad debtors? Bibby Financial Services is the largest global independent specialist provider of debtor finance (also known as invoice finance, factoring, cash flow finance and invoice discounting) - a flexible and accessible cash flow funding tool for small-and-medium sized businesses. It maintains a network of 32 companies and services over 5,400 clients in 14 countries worldwide, including the UK, US, Canada, France, Germany, Ireland, The Czech Republic, Slovakia, Poland, India, Hong Kong, Sweden, Australia and New Zealand. It is part of the Bibby Line Group, a family-owned business-to-business services group with origins in shipping dating back over 200 years to 1807. Integral Collections are a subsidiary of Bibby Financial Services specialising in debt recovery for SMEs. For more information, visit integralcollections.com.au Debtor finance is designed to improve business cash flow and support business growth by releasing cash tied up in unpaid invoices. Unlike other funding arrangements, no real estate security is required, making it more accessible for small and medium sized business owners. For more information on Bibby Financial Services please visit www.bibby.com.au or email marketing@bibby.com.au Disclaimer: This information has been prepared to provide general information only. It is not intended to take the place of professional advice. In preparing the information, Bibby Financial Services relied on survey results generated by Galaxy Research. The Bibby Barometer of Small business PAGE 5