Rate rise hidden consequences… Rush on Telstra case on Coonan… Profit warnings low… Gen-Ys are earning plenty… Ad blitz on IR from business
Wednesday, August 8, 2007/
- Rate rise hidden consequences
- Rush on Telstra case on Coonan
- Profit warnings low
- Gen-Ys are earning plenty
- Ad blitz on IR from business
- Economy roundup
- Quote of the day
Another interest rise of 0.25 this morning to 6.5%, on top of five interest rates rises since 2004, could act as a tipping point for many businesses already in debt to the tax office.
And there is worse to come with many economists predicting interest rates could rise again by early next year.
The rise will affect all business owners with borrowings from the bank and with their homes on the line.
A recent report for the tax office showed that 600,000 small businesses (under $2 million revenue) owed the tax office a staggering $6.4 billion.
Many of those companies have taken advantage of the easy credit available by aggressive financial institutions and mortgage brokers to try and dig themselves out of their current situation – and they will be hit hard with this rise.
As penalties from the tax office accumulate, this latest interest rate rise could well push these marginal businesses over the edge.
Grey Hayes, director of accountants Hayes Knight, says it is very important for businesses to look at the flow-on effects of interest rates. Those in industries where interest rates affect buying decisions should be asking what impact this will have on consumer sentiment. Those who sell highly discretionary items will see some impact, and if they have plans for say 20% growth, may need to modify those projections and question whether they need to carry the same stock.
There are other hidden consequences of an interest rate rise for all business owners
Here are the top six:
- Expect a slow down in consumer spending. Businesses that sell highly discretionary products can expect to be hit particularly hard. All companies should look at their stock, strategy and infrastructure plans.
- Bad debts will grow and some companies will default on payments to creditors and staff, so businesses need to re examine their credit policy.
- Debtor days will blow out. People might take 40-60 days to pay bills instead of 30 days, so the cash cycle will slow down.
- Fears of a credit squeeze are growing, which will mean that businesses will have to develop better business plans and will find it harder to borrow money.
- Pressure from staff for an increase in wages. As they shift jobs and the cost of their mortgage rises, they will be looking for salary increases.
- Import costs will rise putting pressure on importers.
Did we need this interest rate rise? How will it affect you? Send your comments to [email protected]
Also Amanda Gome’s blog: With the average Australian owing $160 for every $100 they earn, this could be the rate rise that drives home the message: cut back on your spending.
A Federal Court judge has given Telstra until Friday to show that there is some substance to its legal claim against Communications Minister Helen Coonan and her decision in relation to the billion-dollar Broadband Connect program.
Last week, Telstra launched legal action against Coonan alleging that her decision to award nearly $1 billion to an Optus/Elders consortium to build a rural broadband network lacked procedural fairness.
However, Telstra is still working to build the evidence it needs to make out its claim and has asked the Court to force Coonan to provide it with documents relating to the decision to help it do so.
According to The Australian Financial Review, Federal Court Judge Peter Graham yesterday told Telstra that the claim it has lodged is too general and must be recast in more specific terms by Friday if it is to have any chance of obtaining the documents it seeks.
But he set a court date for a full hearing of the matter on 13 September, a relatively speedy listing that could throw the Broadband Connect program into chaos before it has even got off the ground.
Telstra’s claim comes as the Government moves closer to announcing the tender guidelines for the construction of a fibre-to-the-node broadband network across metropolitan Australia. Reports suggest Coonan plans to release the guidelines this week.
A roaring economy has meant a quiet confession season, according to Ernst & Young’s bi-annual Profit Warnings Watch. The number of profit warnings issued by companies between January and June 2007 was 32% down on the previous corresponding period.
John Georgakis, a partner at Ernst & Young’s corporate restructuring division, says the dramatic decline in profit warnings is indicative of Australia’s strong economic conditions coupled with prudent expectations management. As corporate profits and share prices have increased over the past two years, the number of profit warnings have declined.
However he does warn that the interest rate rise could cause a slow down in spending and reverse the trend.
The most common reasons for companies issuing profit warnings are competitive pressures followed by adverse weather conditions such as floods and droughts. Increased costs and overheads as well as production problems were also cited as companies issuing warnings to the ASX.
Mid-sized companies (turnover between $500 million to $2 billion) issued 215 of the warnings with consumer discretionary companies dominating as they cited concerns with increased costs and overheads as the reason.
Australia’s export companies could also face pressures if the Australian dollar remains at current levels or rises.
Generation-Ys are more focused on keeping fit than building their careers, but this hasn’t stopped many of them earning big dollars, a new report reveals.
According to a new report by AMP and research organisation NATSEM, keeping fit is the top priority for 80% of people born between 1976 and 1991, ahead of more training and a successful career.
The combination of a lifestyle focus and hunger for training among Gen-Ys was reflected in the results of a recent SME Opinion Leaders Poll, which found that 76% of employers believe that Gen-Ys are more demanding than other workers when it comes to wanting time off, while 71% said Gen-Ys are more likely to ask for further training opportunities.
Interestingly, however, Gen-Y’s desire for work-life balance doesn’t seem to have hurt them in the hip pocket. According to the AMP/NATSEM report, the most affluent 20% of people living in Gen-Y households bring in $120,000 a year, while 40% earn more than $75000, well above the national average.
Business groups including the Australian Chamber of Commerce and Industry, Business Council of Australia and the New South Wales Business Chamber will today launch a multi-million dollar advertising campaign in support of the Coalition’s industrial relations laws.
The advertising campaign represents a last ditch attempt by business groups to save laws that have consistently rated poorly in opinion polls and are widely perceived as being a key factor behind the current unpopularity of the Howard Government.
SME concerns about any changes to the laws are expected to be a focus of the ads, The Australian Financial Review reports. They will also highlight the economic case for more flexible workplace laws, including a recent report by economic consultancy Econtech that set out massive productivity gains in the building industry since the introduction of a dedicated construction industry workplace watchdog.
Retailer David Jones has reported fourth quarter sales growth of 12.1% to $509.4 million, or 9.2% against fourth quarter 2006.
Full year sales revenue was up 9% to $1.9837 billion, a result David Jones CEO Mark McInnes said meant the retailer is well positioned to capitalise on the anticipated strong consumer sentiment expected in 2008, The Age reports.
The S&P/ASX 200 has again cast off the shackles of recent market wobbles to be trading strongly today, at 11am up 1.3% on yesterday’s close to 6064.3. Despite this morning’s interest rate rise, the Australia dollar has declined slightly this morning, reflecting the fact that a rise was widely priced in by market traders. At 11 am the Australian dollar is worth US 85.72c, slightly down on yesterdays’ US85.80c close.
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