Business Looks Towards The Upturn - Ai Group / American Express Report

Business Looks Towards The Upturn

Sydney: One in every six businesses surveyed believed an improvement in business conditions was already underway, with well over half of companies expecting the upturn to be well underway by the first quarter of 2010. This is according to the Australian Industry Group / American Express report released today Looking Towards the Upturn.

"The survey underlines the resilience of Australian businesses who are trying to look ahead and plan for growth despite the continuing toughness of business conditions which are highlighted in the survey," Australian Industry Group Chief Executive Heather Ridout said today.

"Encouragingly, many companies see light at the end of the tunnel with one in six believing an improvement is already underway with this building to a majority as we move into 2010. At the same time, in the next six months the rebound in sales overall looks modest with growth of 0.7% while employment will continue to be under pressure with a 0.9% reduction in employment forecast over the next six months. Investment will remain subdued with a forecast 4.1% decline.

"Companies have worked hard to take costs out of their business. They have reviewed and restructured their business strategies; are looking to develop new products and markets; and have a keen eye on the importance of innovation. Skill development continues to remain a priority, and has been a key factor contributing to business seeking to retain staff during the downturn

"While the recovery may well be slow, and growth more moderate than seen in the past, the vitality being shown by business to look ahead and plan for the upturn is a strength that can be built upon. The Federal Government and the Reserve Bank of Australia need to continue to be prepared to act to ensure the recovery follows an orderly path and is sustained," Mrs Ridout said.

The survey of 500 businesses revealed the full impact of the Global Financial Crisis, with almost 60% of companies reporting a decline in sales, 56% claiming to have reduced staff numbers and 32% reducing investment during the past six months.

The serious pressure of declining sales and employment over the last six months as well as mixed results from cash flow management strategies has forced Australian businesses to adopt aggressive strategies to take advantage of the coming upturn.

Australian businesses are expecting to use the coming upturn to improve sales of current products and services, develop new domestic markets and introduce new products and services.

Eighty percent of businesses stated improved domestic demand will stimulate discretionary spending. This was followed by improved overseas demand, reductions in government regulation and lower finance costs. Developing new products, skills development and training, capital investment in plant and equipment and research and development were all named as priorities for discretionary spend as the economy recovers.

Micro and Small Business Less Nimble than Larger Counterparts

Overall the survey suggests that large business has been able to respond to the downturn and prepare for the upturn more quickly than micro and small businesses have. While responses were similar for companies of all sizes on how to lift company revenues during the downturn 68% ranked improving sales of existing products and services as a high priority, 49% looked to develop new markets and 44% aimed to release new products and services micro business was less likely than large business to prioritise reducing operational costs (only 45% of micro firms compared to 65% of large firms) in a bid to protect the bottom line.

Cash flow pressures also continue for small business with 51% of micro firms seeing either negative or no impact on cash flow from their strategic responses to the downturn. On the other hand, 55% of large firms saw a positive impact on cash flow from their strategies.

In addition the percentage of companies likely to increase expenditure on innovation over the next six months varied with size. Most likely were large firms, with 35% expecting an increase, while least likely were micro firms, with only 18% of companies expecting an increase.

American Express Vice President of Small Business Services Rachel Stocks said while the survey showed some early signs of confidence returning it also highlighted the need for longer term cash flow management strategies by micro and small business.

"Australia has been fortunate in that the downturn has been milder than the rest of the world however at American Express we are acutely aware that this year has not been without significant challenges for our small business customers.

"Over the last 12 months American Express has facilitated an increase in short term lending for small business spend in the wholesale industries by 50%, helping to ease the cash flow burden for small business and enabling suppliers to continue offering best terms to their customers."

"There is no doubt that the key to the upturn for Australian business is domestic demand as this will lead to a rise in discretionary spending which will be necessary to support the strategies being undertaken as part of the business response to the recovery," Ms Stocks said.

Media Contacts:
Tony Melville, Ai Group
0419 190 347 or
(02) 6233 0700

Katie Rodwell, American Express
0417 456 011 or
(02) 9271 4561

Todd Beavis, American Express
0410 667 060 or
(02) 9271 2228

Key Findings

*Reflecting enormous pressure from weak global and domestic demand, 58.3% of respondents reported that their sales had fallen during the first six months of 2009, with close to a half experiencing a decline of 21% or more. In contrast, only 22.9% registering an increase in sales;

*Looking to the next six months, the proportion of firms expecting an increase in sales (34.5%) slightly exceeds those anticipating a fall (30.5%). Micro (26.9%) and small firms were less optimistic about an improvement in sales over the next six months compared to medium and large firms;

*63.5% of companies indicated that they have reviewed business plans, with a further 24.6% indicating that they are currently reviewing them in response to the downturn. The percentage of firms reviewing their business plans increased by size, suggesting that large firms were the quickest to respond to the downturn;

*The most popular revenue side strategy in the downturn is improving sales of current product and service lines. 68.1% of firms cited this approach as being of high importance. Small firms ranked this strategy the highest (71.4%);

*Reducing operational costs is by far the most cited strategy through which companies are managing their costs. 57.9% of respondents stated that this was of high importance. Large firms appear to have the greatest scope to reduce operational costs (cited by 65.8%), while micro firms appear to have the least scope (45.9%);

*41.0% of companies saw a positive cash flow impact from strategies to deal with the downturn, while 35.8% have seen a negative or no impact on their cash flows. Cash flow benefits varied with firm size, with 55.4% of large firms citing a benefit compared to 24.2% of micro firms;

*One in every six respondents believed an improvement in business conditions was already underway, with a further one-quarter of all respondents expecting an improvement in economic conditions in either the third quarter (10.5%) or fourth quarter (14.7%) of 2009. The first and second quarters of 2010 are equally popular responses, with 16.4% and 16.0% of companies anticipating an improvement in these periods respectively. Micro and small companies generally saw the pick-up coming later than large firms;

*Improving sales of current products and services lines is clearly the most favoured strategy for positioning for the recovery, irrespective of size or sector, with just fewer than two-thirds of firms (62.0%) identifying this course of action;

*Nearly 80% of all respondents identified an improvement in domestic demand as a key trigger for a rise in spending within their firm, overwhelmingly the most popular trigger. This was marginally more important for micro and small firms compared to large firms;

*The issue of skill shortages still resonates with many firms, despite job cuts in the first half of 2009, with 27.5% of respondents considering skills development and training to be a high priority when the economy recovers. This was particularly important for medium sized companies;

*24.7% of firms plan to increase expenditure on innovation over the next six months compared to 6.5% likely to cut expenditure (and 68.8% unchanged). Large firms were approximately twice (35.5%) as likely to spend more on innovation than micro and small firms;

*The Federal Government's Small Business and General Business Tax Break initiative has influenced the investment plans of almost 30% of respondents. Small and medium firms (which get the highest tax deduction) ranked this more important than large and micro firms;

*20.6% of companies indicated they would spend more on R&D because of the Federal Government's new tax credit, which effectively doubled the R&D related tax benefit. Small and medium firms were marginally more likely to spend more than micro and large firms.

About the Survey The Australian Industry Group / American Express Looking Towards the Upturn Report involved 500 firms in the services, manufacturing and construction sectors. These firms account for total employment of around 228,622 employees and total annual turnover of $36.4 billion. The survey was conducted in June 2009. A full copy of the Australian Industry Group / American Express Looking Towards the Upturn Report is available at www.aigroup.com.au.

SOURCE: Ai GROUP / AMERICAN EXPRESS