Mid-market companies miss growth targets, struggling for capital

Companies in the mid-market are being hit hard by the downturn, with a big jump in those not meeting growth targets and optimism about one year prospects sinking to a new low, according to the latest PricewaterhouseCooper’s Business barometer.

The cost of debt has emerged as a major challenge to raising capital, and respondents believe the value of their businesses has fallen by more than 25% in the last 12 months.

The report, which looks at 753 businesses with turnover between $10 million and $100 million, shows that while the companies have a more bullish outlook for the medium term, the immediate outlook is grim.

One year sales and profit targets have almost halved compared to August 2008, to 5.9% and 6.6% respectively. Business growth in the past year has also fallen, with the average percentage growth in sales falling from 14.4% in February 2008 to 7.6% in February 2009.

About 47% of businesses say they did not meet revenue targets in the past financial year, with the main key being the inability to secure funding at a reasonable price.

Mid size private businesses are big employers, so the news that 73% are not looking to hire in the next six months is bad for employment figures. About 10% plan to reduce staff. In fact some of the companies have already reduced staff, with falls in the average head count.

“The sentiment of this sector is back to basics, and looking to lower debt and maximise cash balances,” says PwC partner Gregory Will.

He says the biggest issue coming out of the survey was the availability and cost of credit. About 37% reported that the cost of debt is a primary challenge to raising capital. And the availability of credit appeared as an issue for the first time, with 23.5% nominating this as a difficulty.

More than half the companies (58%) say they have no plans to fund any major investments, up from 45% in February 2008. And 45% say the availability and price of debt is restructuring their capital expenditure plans.

Will noted that organic growth continues to lie at the heart of plans for growth over the next few years. “Businesses have to ask themselves how can they do things differently? With the economy tracking backwards, companies can’t rely on the organic growth that they have relied upon in the past. Companies are going to have to look at different products or markets, or buy a competitor.”

The report also found that the war for talent is easing, with lack of qualified talent falling as a hiring constraint. And interestingly, with no incentive to stand out as an employer of choice, the percentage of businesses planning to offer better conditions declined significantly.

“They now don’t have the resources to provide all these things. They are looking at practicalities, and it’s not so easy to become an employer of choice,” he says.

The report also found that up to 60% of businesses believe that the value of the business has been eroded in current conditions, with the average decline estimated at 26.6%. “This has affected their plans to sell, and affects succession planning,” Will says.

One surprise finding was the removal of WorkChoices appeared as a major hiring constraint for the first time. “Last survey it didn’t even come up,” Will says.

“However these businesses now need the flexibility and so they are looking at the ramifications of the IR changes and asking how flexible will the new regime be?”