Finance

Credit crunch hits private businesses

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Private businesses are planning fewer investments, hiring less staff and are feeling the impact of the global credit crunch with a less optimistic short-term profit growth target, according to the Private Business Barometer, by PricewaterhouseCoopers.

The barometer, which looks at 750 private Australian businesses with an annual turnover of between $10 million and $100 million, shows that half the respondents are less inclined than they were 12 months ago to make substantial investments.

Over half the businesses also report that the availability of credit was a major impediment to meeting targets. PwC partner Gregory Will says a third of the businesses surveyed said the global credit crunch had significantly increased the cost of borrowings. “A further third said global credit tightening had prompted them to be more conservative in their short term outlook.”

Close to 20% say the cost of debt was a difficulty in securing capital, a jump of six percentage points from October 2007.

PwC partner Greg Hodson says that the debt to asset ratio of the businesses surveyed was low, so the companies were well placed to borrow money. “It’s more the cost of funding and concern at the level of security they may have to offer,” he says. Some of the entrepreneurs surveyed say the credit crunch was also affecting cash flow.

Naomi Simson, who founded gifting business RedBalloon Days, says very large organisations are saying they will pay in 90 days, despite her conditions which clearly state 14 days. ”That has just happened recently in this calendar year,” she says.

The barometer reported that organic growth was the most desired approach for private business over the next three years. However, Hodson noted there was significant acquisition activity among the private businesses. About 12% are planning to grow through acquisition in the next 12 months with nearly a quarter looking at acquisition in the next three years.

Lack of qualified talent and high growing wages was the greatest hiring challenge for private business. Despite this, most are not contemplating offering benefits other than good pay to attract talent. Instead, private companies are using better bonuses and salaries to manage the skills shortage and prevent staff leaving.

Plans to hire new staff are also being shelved. Just one third of private businesses claimed to have definite intentions to hire new employees, down from close to 50% in October 2007.

The good news is that the private businesses continued to report strong profit performance, with 13.1% average increases in the 12 months to February, 2008. Nationally, one out of ten businesses met or exceeded their growth targets from the previous financial year. And while they see conditions as unsettled in the short term, they remain optimistic that there will be a return to more favorable conditions in 2009.

It’s too early to tell whether that’s an informed view or wishful thinking. As Will pointed out, most of the private companies surveyed were started after the last recession and are unused to these conditions.

Simson adds: “We are entrepreneurs and therefore optimistic by nature, so the glass is always half full.”

 

Read more on the credit crunch

 

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