Finance

Company profits jump 26%: Should SMEs feel more confident after these big profit numbers?

Emma Koehn /

A 26% spike in estimated company profits for the December quarter is being welcomed by members of the small business community, but while SMEs are confident they can build profitable companies in Australia, challenges remain.

The Australian Bureau of Statistics’ business indicator figures for the quarter ending December 2016 show seasonally adjusted estimated company operating profits were up 26.2% compared with the same quarter the year before.

Growth was powered by a 49.7% jump in mining profits, while profit levels in the manufacturing sector rose 11% for the quarter.

Across all industries, unincorporated companies also experienced a jump in estimated profitability, up 7.7% on the corresponding quarter in the previous year. Gross operating profits for unincorporated retail companies were up 11.5%, while unincorporated financial services businesses recorded a 54% increase in profits.

Rob Ward, co-founder of Smart50 finalist Annex Products, believes Australian company founders should feel confident that it’s possible to start a retail business and make a profit in these conditions, but profitability is complicated and he’s seen other retailers face challenges as they grow.

“Probably 10-20% of our business is done in Australia, and at the same time we’re bootstrapped, so we definitely think it’s possible to be out there making a profit,” Ward tells SmartCompany.

“When you’re scaling up, profits have to be quite significant, you really do need those decent, healthy margins.”

However, retail businesses can face real struggles to maintain profits once they go from direct-to-consumer models to dealing with distributors in traditional bricks-and-mortar retail, Ward says.

“Something I’ve seen with other smaller companies is when they initially make their product and they take it to market, a lot of the numbers is based on a direct consumer model. Then when you have to go into more traditional retail, the margins are less there,” he says.

Those making products that are sold through other providers have the challenge of ensuring they are able to make a profit for their business and for the other party selling it, Ward says.

“There has to be a decent margin for your distributor,” he says.

Numbers beat expectations, but wages stand still

The ABS profit estimates took analysts by surprise, going well above expectations overall.

In a note on Monday, Westpac highlighted that the overall company profits figure was “well in excess” of the median predicted figure of 8% and Westpac analysts’ expectations of 9.5% growth.

However, data about wages also surprised. Wage growth contracted by 0.5% for the quarter, which is the weakest quarterly wage figure since the global financial crisis downturn in 2009, according to Westpac.

Annual growth in wage incomes overall slowed to 1.0%, which was flagged as a potential challenge.

“Notably, sluggish wage incomes are constraining consumer spending, which has slowed relative to the solid performance in 2015,” said Westpac analysts.

The observation on consumer spending comes as members of the broader small business community welcomed the Fair Work Commission’s decision to cut Sunday and public holiday penalty rates in the retail and hospitality sectors, which they say will contribute to strengthened business conditions and more growth.

Read more: Penalty rates decision fires up political debate, but rollout for small business still unclear

At the end of last week, Australian Retailers Association executive director Russell Zimmerman said the decision would now contribute to more work overall.

“This reduction in Sunday penalty rates will provide more employment opportunities for young workers seeking both additional hours and new employment over the weekend,” Zimmerman said in a statement.

However, exactly what the decision means for an individual company’s bottom line will need to be worked out on a case-by-case basis, says Council of Small Business Australia chief executive Peter Strong.

“Employees and employers will have to work it out—they’ll sit down and come to some agreement. There’s even some businesses that will look to make some of the part timers full time [after this]—it gives people a new chance to have a look at their rates budget and see what they can do about it,” he told SmartCompany last week.

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Emma Koehn

Emma Koehn is a former senior SmartCompany journalist.

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