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Still tough for the fruits of their labour

17 Dec 2012 THE AGE - CHRISTOPHER NIESCHE



Lower interest rates will give small businesses a boost in 2013 - particularly those exposed to the housing sector - but conditions will remain tough, analysts say.

The economy will start to pick up in the second half of next year, but not all small businesses are going to see the benefits, especially with businesses and governments keeping a tight rein on expenditure.

"A lot of small businesses are probably seeing things as weak as they're going to be right now," says Richard Robinson, an economist at forecaster BIS Shrapnel. "We expect some sort of gradual improvement, but it's not going to be fantastic and it's not going to be even."

Consumer and business confidence remain weak and Robinson says that says a pick-up is needed to get shoppers and businesses spending. "People are still worried and they're not prepared to go out and spend," he says.However confidence among small businesses has declined. Small businesses – those with annual revenues below $5 million – have become increasingly pessimistic over the past two years, according to the Business Financial Services Monitor, a regular survey conducted by DBM Consultants.

About half of small businesses expect revenue and staff numbers to grow, according to the latest survey conducted in October, down from about 60 per cent two years ago. Meanwhile, the number of businesses with a pessimistic outlook has doubled to around 20 per cent.

Nonetheless, more businesses are positive than negative about their outlook and Peter Strong, executive director of the Council of Small Business of Australia, which released the research, says businesses are usually quite good at predicting what sort of year they're going to have.

"There's an increasing number of small businesses that are going to be in trouble. It's not a majority of small businesses, so this isn't going to be a disaster for the economy," he says.

Strong says small businesses remain concerned about the power of major shopping centre owners to charge rents as well as the power the major supermarket chains have to drive down prices to suppliers.

Matthew Hassan, senior economist at Westpac, says this year's interest rate cuts will give small businesses a boost next year. The latest cut by the Reserve Bank earlier this month took the official cash rate to 3 per cent equal to the "emergency lows" of the global financial crisis.

"It's taken a while for those [interest rate] moves to generate some improvement, but as we go into year-end we are getting some clearer signs that consumer sentiment has improved, that the housing market looks to have come off the weak levels that we were seeing for much of the year and prospects are improving somewhat," he says.

But Hassan tempers his optimism. The resources sector is slowing, with investment in mining expected to peak and soften in the second half of 2013. "Conditions are still looking a little shaky in terms of those non-mining sectors picking up the slack," he says.

Prospects are improving for those sectors most closely linked to interest rates, such as housing. The Sydney and Perth markets are picking up, while Brisbane and Melbourne are still weak. Hassan says the RBA might cut rates again in March to cement the housing recovery.

The rate cuts won't help retailers as much and consumers will remain cautious, says Hassan. "It will continue to be a fairly patchy path for retail," he says. Those retailers with online exposure are likely to do better, he says.

The outlook for business-to-business enterprises is also patchy. "Many businesses will still be in lockdown mode as far as spending goes," says Hassan. "I think they'll be looking for this housing-led, interest rate easing-driven recovery become a bit more solidified before they become a little bit freer with their spending."

Fuel prices have replaced interest rates as the biggest concern for small businesses, according to a survey earlier this year for software company MYOB. Cash flow was third, followed by price, margins and profitability.

"For those that are seeing their sales shrink, then cash flow becomes a very, very important metric for them to have confidence that their business will be around for the long run," says Tim Reed, chief executive of MYOB.

"I'm very happy that it makes the list, because when cash flow is proactively managed businesses have a much higher success rate."

A lot of small businesses see rising costs and don't feel they can pass the costs on to their customers. Reed says MYOB's research shows most business owners, and in particular small business owners, underestimate the ability they have to raise their prices. "Often the work they do is highly valued by their clients and they should have more confidence," he says.

Reed notes a couple of tax changes introduced in the current financial year that will help small businesses.

The first is the lifting of the tax free threshold on income tax to $18,200 from around $5000, which should entice more of the part-time staff into the workforce which small businesses like employing.

Also in July, the government increased the instant tax write-off for new equipment to $6500 from $1500, which allows a small business to instantly write off the cost of an equipment purchase up to that value. This will encourage business to spend and invest more.