SMEs are feeling increasingly optimistic heading into the final quarter, with new research revealing a strong rise in confidence and expectations for future conditions.
The latest Westpac Melbourne Institute SME Index, a survey of 400 business across Australia, rose from 83.0 in Q2 2016 to 95.6 for Q3 2016, with confidence up in all states bar South Australia.
New South Wales lead the way with the highest improvement in SME confidence (up 21.6% to 99.3), followed by Western Australia (up 17.9% to 90.4), Victoria (up 15.2% to 105.8) and Queensland (up 11.2% to 87.6).
However, the SME Index in South Australia declined by 12.5% to 74.7, which Westpac attributes to factors including harder access to credit and finance and rising government regulations.
The survey also found an increased level of optimism around future conditions, with the Future Conditions Index lifting by 18.7%.
“[This was] reflected by positive changes in employment (6.1% of SMEs have hired more staff in the last 12 months) and in investment (14.4% of SMEs have increased investment in the last 12 months),” the Index notes.
There was a large divide between SMEs’ perceptions of current and future conditions by sector: Westpac reports SMEs in hospitality and recreational services are the most optimistic (138.7), while SMEs in manufacturing remain pessimistic about current conditions (Current Conditions Index reading of 77.1) but are hopeful about the next quarter (Future Conditions Index is 108.6).
Westpac’s General Manager of SME Business Bank, Julie Rynski says it is pleasing to see a strong uplift in business optimism.
“These results are a solid recovery from a weaker level last quarter with a promising view for the lead in to Christmas.”
Despite the overall lift in future conditions, the Current Conditions Index sits at 78.2. Westpac says this is due to weak activity and declining profits, with 5.2% of SMEs experiencing a decline in real business activity over the last 12 months, while 17.2% reported a decline in profits over the same period.
According to Westpac senior economist, Matthew Hassan, there were a number of contributors to the current results.
“Some of the positive forward view may reflect the lead-in to the Christmas period, a particularly important high season for many retailers and SMEs in the hospitality sector,” Hassan says. “Expectations have no doubt been buoyed by recent interest rate cuts as well.”
He adds the survey suggests current conditions are uneven, and while growth is continuing, incomes remain a weak spot for the Australian economy that is pressuring SMEs’ profitability.
“Perhaps the most promising aspect of the survey is the solid rise in employment reported over the last year. It suggests the positive forward view is not just a hope but something small businesses are actively planning for.”
Rynski highlights Westpac customers have indicated their top three business goals in 2017 are revenue growth, retaining customers and increasing business efficiency.
“Now is a pivotal time when SMEs should be critically reviewing the past 12 months and making meaningful changes for the year ahead.”
Rynski shares six tips for forward thinking SMEs:
1. Focus on the customer experience
“Consumer preferences are changing. As Australia’s population ages, and average incomes rise, the demands of consumers are shifting. Consumers are increasingly demanding services, not just goods, and focused on the social and environmental impact of the businesses they purchase from. SMEs that focus on customers and how their offerings can meet customer needs are more likely to succeed. A customer service focus and investment in brand and technology will be important in future success for SMEs.”
2. Be adaptable
“As the business landscape continues to evolve, with increased integration with Asia, disruption from digital technologies and ever-rising consumer expectations, Australian SMEs will need to be resilient and adaptable to change.”
3. Hire and retain the right staff
“While employees – mature employees especially – prioritise job security, many are considering a move. Create a workplace that is flexible and accommodating to ensure you avoid a high turnover year on year.”
4. Don’t be afraid to collaborate
“Success is not just about beating other businesses – sometimes, it involves working with them, collaborating and creating shared value. Through complex supply chains, many businesses rely on others – more than half of the smallest businesses receive most of their income from other businesses. Collaboration between businesses – some with the capital, some with new ideas, and others with market adjacencies – will generate value both for the businesses and have broader benefits for our economy and society.”
5. Invest in yourself/ your leaders
“SMEs’ success can come during any market conditions and present opportunities in any industry. SMEs are in control of their own destiny. The most important lever Australia can pull to boost business success is the toolkit of its business leaders – whether the business is big or small. This includes investing in fit for purpose education, management and strategy skills, international experience and connectivity.”
6. Always think ahead
“Have a track record of delivery and the capability to meet tomorrow’s challenges by being resilient to stay relevant in the future. And make a contribution – help shape Australia in ways big and small for customers, employees and the community. All SMEs have the potential!”