Since 2006, Prushka has carried out a client survey of its SME client base.  The survey is carried out every 6 months.

The results of the survey are an important indicator of the real state of the economy and of the intention of SMEs, because they are fresh and provide an insight into the thinking of SMEs, well before anything hits official figures.

The client base is just short of 57,000 SMEs and the survey covers twenty industry classifications.

There is a great deal to be learnt from the results, including some surprises.

The relevance of the results is that almost all of the SMEs surveyed will be customers of larger suppliers which have a credit manager running their credit departments.  Accordingly, if there are early warning bells arising, it is best to know about them now, rather than later, when they hit official figures.

Optimism

The biggest surprise to me was that 55% of respondents are planning for growth in the following 12 months and 25.6% are planning for consolidation.  Only 19.4% are planning to cut costs.

This is a really positive indication of the health of the SME sector.

Cash Flow

Surprisingly, 45.4% of respondents have a cash buffer in place, if the situation arises and only 18.8% rely on bank funding.

This is confirmation of the underlying health of the SME sector and is probably a result of the fact that virtually since the GFC, banks have severely curtailed their lending to SMEs, particularly unless there is a real estate security provided.

Concerns of SMEs

The major concerns of SMEs are continuing to grow their business (41%) and profitability (38%).  Unpaid debts were a concern for 24.8% of respondents.

Again, my conclusion here is that the SME sector is essentially sound.  This is borne out by external indicators, such as the low rate of company liquidations and also low business related bankruptcy rates.

Credit Policies

SMEs tend to operate conservative and sensible credit policies.  70.4% have trading terms of under 30 days and only 5.1% have trading terms of over 90 days or no set time for payment. 

I am sure that many credit managers would be envious of those figures.

SMEs tend to refer their overdue accounts to a debt collection agency much later than larger businesses.  Only 14.4% refer accounts at under 60 days overdue whereas  61.1% make referrals beyond 90 days. 

A common mistake made by SMEs which we continually observe is that they are nervous about referring overdue accounts to an agency because they do not “want to upset the client”.  This attitude is very different from larger companies, where the credit and collections functions are handled by different people from the sales and customer service personnel.

Industries at Risk

The standout industry is building and construction.  This category includes every business which is directly related to building and construction, including suppliers and subcontractors. 

Respondents indicated that 21.1% believe that this industry takes the longest time to pay invoices.

This is borne out by our own experiences over the last 9 months, where there has been a substantial lift in accounts being submitted which are owed by building and construction debtors.

No other industry causes concerns like this.  The next significant industry is professional services, at 8.8%.

To take away from this is to exercise caution when granting credit to customers in the building and construction sector.  Where possible, get personal guarantees and act quickly if there is a default. 

The concern about this sector is that it is a key driver of economic growth, so a slowdown will impact economic growth generally.

Consumers

SMEs tend to have a good handle on the economy, because they are talking directly to their customers on a daily basis.  Thus, their perceptions, when aggregated, really provide meaningful insights. 

The respondents believe that there has been little change in consumer spending behaviour over the last 12 months.  61% identified that consumers’ ability to pay their debts in a timely manner has remained constant over the last 12 months.

The perception of the major reasons why consumers have been unable to pay their debts can be summarized as follows:

General hardship                                             34.7%

State of the economy                                    14.4%

Increased household living costs               13.1%

The remaining items are statistically insignificant.

Summary

The report provided some reassuring conclusions. 

Despite the constant negative media picture, the economy is sound and the SME sector, which comprises more than 97% of the active trading businesses in Australia, are essentially sound and well run.

When providing credit to an SME, provided that there is a track record and good credit history, the chances of that debt becoming a bad debt is lower than many other periods I have experienced.

A conclusion is that it is good policy to increase credit to SMEs, subject of course to the normal credit checking processes.

The industry to watch closely is building and construction.

A question which would have been good to include is; “Have you found it more difficult to obtain bank finance since the banking Royal Commission”.

My perception is that the emerging credit squeeze , caused by banks over-reacting to the commission, may very quickly cause a credit crisis, which could jeopardize the financial position of a large number of businesses.

 

The writer is also the author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both published by New Holland Publishers.

 

Roger Mendelson

CEO of Prushka Fast Debt Recovery Pty Ltd; and
Principal of Mendelsons National Debt Collection Lawyers Pty Ltd

T: 1800 641 617

W: www.prushka.com.au

December 2018

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