SMEs have been dealt an uncertain hand – by the economy, a new government, and by the business outlook – but winning growth and profits will not be impossible. MIKE PRESTON uncovers the aces you’ll need to stay in the game.
By Mike Preston
The businesses that succeed in 2008 will be those that best respond to change – in the economy, in government, and even in the way customers spend their money.
The past decade has been one of relative stability, with good economic times, steadily rising property prices and a long-standing federal government creating a business environment with relatively few surprises.
But 2008 will be different.
The US sub-prime crisis will continue to fuel worries about the global economy, and soaring petrol prices and inflation in Australia threaten to put the squeeze on profit margins.
As well as pursuing its own legislative agenda in areas such as industrial relations, the newly elected Rudd Government is responding to the inflation threat by tightening its belt, squeezing – and in some cases ending – supply arrangements with business that had gone undisturbed during the long Howard years.
And even as costs go up, consumers will be demanding more from retailers and service providers – more authentic social justice and green credentials and more opportunities to personalise their consumer experience.
But while these changes present challenges for Australian SMEs, they also bring a new range of opportunities for savvy business owners to grow their profits and get an edge over their competitors.
So here they are: 10 tips to making 2008 a year for business growth and profit.
Two economic phenomena threaten to shake up the Australian business landscape in 2008; the international credit squeeze, triggered by the US sub-prime crisis, and worrying levels of inflation.
Richard Robinson, the chief economist with business researchers BIS Shrapnel, says while consumer demand is likely to remain strong, many businesses will find it difficult to meet that demand and maintain profits.
“Some businesses will be caught between a rock and a hard place – growing demand means the pressure will be on to expand, but increased costs for petrol, the tight labour market and the credit squeeze will make it an expensive and hard to fund process,” Robinson says.
Smart businesses will look for ways to improve their exposure to aspects of the economy that present opportunities for profit, Robinson says.
The value of the dollar is likely to stay high, so businesses should look at ways to maximise the proportion of their inputs they import from overseas.
Alternatively, Robinson says, businesses that are able to export goods or services in sectors where demand is so strong that they will buy even with the strong dollar – principally mining and energy – will be in a strong position to lift profits in the year ahead.
That means opportunities will continue to present themselves to feed-in businesses to the mining sector in Australia in a whole range of areas, from food preparation or occupational health and safety to IT and financial services.
For the first half of 2008, Australian banks will continue to have the jitters, thanks to the international credit squeeze.
That will mean higher interest rates and a more picky approach to lending, making it harder for those SMEs that want to grow to borrow the money they need to do so.
According to Dun & Bradstreet Australasia chief executive Christine Christian, many businesses will be forced to fund growth from their own cash reserves – and that means keeping a close eye on cash flow.
Christian says debtor management should be a priority for businesses looking to increase cash flow, but the tighter economic environment means a tough approach will be required to get those overdue debts collected.
“When there is an economic correction, the companies that scream the loudest get paid first,” Christian says. “SMEs often fail to implement and enforce clear terms of trade, but in this environment that will just see them languish at the end of the food chain.”
Greg Hayes, senior partner with accounting firm Hayes Knight, gives two recommendations for getting your cash position up to scratch; make sure your levels of trading stock are spot on, and adopt a tough approach to debt collection.
“Make sure you have someone in your organisation with a bit of mongrel in them to follow up debts relentlessly,” Hayes says. “You need someone who can put the sanctions in place to collect money without being afraid that they might lose their next sale.”
For most of 2008, inflation, rising interest rates and the price of petrol and labour will be through the roof. That won’t necessarily mean slashing your profit margin to the wire – if you can pass on the higher costs to consumers.
In order to put your business in a better position to pass on increased costs to consumers, a good strategy is to specialise in a niche market with stable demand.
Sensis Business Index author Christena Singh says relatively low competition in a range of retail and service sectors makes specialisation a high-profit-margin business strategy.
“Some of the highest levels of demand per business are usually in niche areas, looking at specialised products and services, often in the business-to-business market, servicing areas of high consumer demand,” Singh says.
Sensis research has found the highest level of search per business in Australia occurs in very specialised niche markets, with the top five categories being:
In times of instability, consumers tend play it safe – and that means a preference for tried-and-true staple products over the challenging or innovative.
Bob Elliott, an accountant and partner with Hall & Chadwick, says he is already getting a sense that more cutting-edge products are taking a little longer to find market acceptance.
“The things that work in 2008 will be the stable and the staple – that doesn’t mean you can’t innovate, but you’re better off focusing that energy on improving processes or quality than rushing new products to market,” Elliott says.
He counsels businesses with an innovative new product to be very certain of the market they are pitching for and how the product will be sold to them.
“A lack of demand might be there in the short term unless you can quickly take the product to overseas markets,” he says.
For those businesses not in a position to tap into growth sectors such as mining, or growth strategies such as specialisation, the coming period of higher volatility and inflation should be a time of planning and consolidation – and preparation for the next growth phase.
While the current instability will make funding growth difficult in the short term, new opportunities will start to emerge in the second half of 2008 as liquidity recovers, according to Marshall Place Associates chairman Colin Benjamin.
In the meantime it is crucial that businesses use the next six months to improve the health of their business.
“Now is the time to really do the review, do the cost audits or identify how you can use outsourcing – anything to take costs down,” Benjamin says. “That gives you the margins and the internally generated capital to take on the next opportunity when it comes.”
Where will those opportunities emerge? In addition to mining and related services, Benjamin says services targeted at busy or older people could do well.
“Health care in particular will be a huge area – baby boomers are the biggest and wealthiest segment of the population and they will be desperately looking for services, to help look after mum, manage their finances or keep healthy,” he says.
The skills shortage may not be something new, but it will continue to be a key obstacle to business success in 2008.
Time and again in 2007, business owners and managers reported difficulty in finding skilled workers to fill job vacancies as their biggest worry.
The ageing of the population means that trend is just going to get worse – in 2008, and the years ahead – according to Michael Schaper, the dean of Murdoch University Business School.
He argues that businesses that break away from the obsession with recruitment and focus on staff retention will enjoy a crucial competitive advantage this year.
“Your people are an asset that doesn’t show up in the balance sheet, and they are getting more valuable by the day,” Schaper says. “Listening to them, working out what they want, making sure they’re skilled and productive, have to be priorities.”
SMEs in particular are often blind to the need to devote energy to staff retention Schaper says, but when they do they often have an edge over the larger competitors in the battle for staff.
“SMEs can be more familiar and friendly with staff, and their smaller size means they can offer flexibility without a huge amount of paperwork, but they often don’t recognise and advertise that as something people value,” Schaper says.
Hiring Gen-Ys may be more trouble than it’s worth, but in 2008 the fat wallets of the cohort born between 1977 and 1992 mean retailers and service providers will ignore them at their peril.
Tim Pethick, the founder of break-through juice brand Nudie and now managing director of innovation consultancy ?What If! Australia, says longer periods of travel and study mean many Gen-Ys are only just starting to exercise their consumer muscle.
And now that they have moved out of home and have a bit of money, they want to consume products and services that meet their appetite for quality and integrity.
“They want the best in life, but they’re also looking for integrity and transparency in what they buy,” Pethick says. “So rather than go camping, they’d rather stay in a five star-resort – and if it is an eco-resort, that’s even better.”
But, Pethick cautions, businesses should avoid attempting a quick fix to give themselves the veneer of social or environmental responsibility.
“They are the net generation and they know how to access information about what they consume, – and to let others know if they feel a product or service is not what it says it is,” he says.
The message is also almost as important as the product to Gen-Ys. “They don’t want to be patronised, so setting the right tone of voice in advertising is absolutely essential,” Pethick says.
Forget about customer service – in 2008, selling will be all about building partnerships with consumers, according to Neo Group consumer researcher Ross Honeywill.
“Where are seeing an acceleration of the shift from the institutional and corporate to the individual and personal, so one of the real imperatives for business success is creating an equal partnership with people instead of a more predatory business/customer relationship,” Honeywill says.
One important element in forming partnerships with consumers is to help them make their voices heard through face-to-face, telephone and online communication options.
But importantly, businesses must ensure that consumers feel their voice is being heard and reflected in the goods or service they receive, Honeywill says.
“They’re telling online businesses what they want and online businesses are delivering, but in the bricks and mortar commerce world that rarely happens, and that is something and that has to change radically in 2008,” he says.
From a practical perspective, giving consumers options in what and how they buy will give them a sense of control, even if they tend to make the same choice anyway.
“It’s all about the individuals deciding, so even if some of the options are relatively or never selected, their presence indicates the business is prepared to be flexible and open,” Honeywill says.
The business of providing goods and services to the public sector can be lucrative, and when governments change new entrants can suddenly find the door is open for them to grab a piece of the action.
The election of the Rudd Government on a platform of fiscal responsibility, and the looming spectre of inflation, existing private sector contractors in a range of areas are being put under pressure to deliver more for less, or cut back entirely.
Kevin Noonan, the head of consulting with government tendering expert Intermedium, says while he is seeing a drop off at the moment in areas such as IT outsourcing as the new Government seeks efficiencies, it has also signalled there will be significant funding devoted to its priority policies.
“The Government is putting the screws on at the moment, but (is) also in the process of framing the May budget, which is when we’re likely to see money for a lot of the major initiatives that the Rudd Government announced during the election – so now is really the time you need to get organised and position yourself,” Noonan says.
Where will the opportunities be? One key area the Government has signalled it will be taking prompt action is in its “education revolution”, including promises to have computers and a fast broadband connection to every school. Noonan points out that all of those new computers will need to be purchased, installed, maintained and replaced, both in the cities and in rural and regional areas where there may not be an existing service infrastructure.
Another area of emerging opportunity is in training. During the election campaign the Rudd Government committed to providing 400,000 training places, twice as many as existed under the previous government. Providers equipped to provide training in emerging skills shortage areas could be in a strong position to take advantage of promised new funding.
Will your workforce be affected by Labor’s planned changes to industrial relations laws? If you don’t know, now is the time to find out; and if they will, now is the time to start planning to ensure a smooth transition.
While the abolition of AWAs is the most high profile aspect of Labor’s IR plans, many businesses could also be affected by its less well-known commitment to rationalise and simplify the award system.
That could mean changes to a range of terms and conditions of employment for employees that may have been working happily on awards for many years.
“If you’re comfortable with your current conditions, it is a good time to lock them in with a collective workplace agreement to ensure a changing landscape won’t disturb workers or create increased compliance costs,” Tim Capelin, managing partner of Australian Business Lawyers says.
And it’s not just a matter of making the best of a bad situation, Capelin says. He points to Labor’s promised “flexibility clauses” as holding out the prospect of allowing easy-to-implement flexible work arrangements with employees.
“We’re still waiting for the detail on Labor’s flexibility provisions, but they do have the potential to deliver individualised arrangements appropriate for employees without the heavy red-tape we saw with AWAs,” Capelin says.
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