Belt-tightening on way to bearing fruit

Small businesses should soon start to see the benefits of this year's rate cuts, writes 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," said the BIS Shrapnel economist Richard Robinson. "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 Mr Robinson said 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 said.

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 in October, down from about 60 per cent two years ago. Meanwhile, the number of businesses with a pessimistic outlook has doubled to about 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, said businesses are usually quite good at predicting what sort of year they are going to have.

"An increasing number of small businesses are going to be in trouble [but] it's not a majority of small businesses, so this isn't going to be a disaster for the economy," he said.

Mr Strong said 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.

Westpac senior economist Matthew Hassan said this year's interest rate cuts would give small businesses a boost next year.

"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 said.

But Mr Hassan tempered his optimism. The resources sector was 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 said.

Prospects were improving for those sectors most closely linked to interest rates, such as housing.

The rate cuts would not help retailers as much and consumers would remain cautious, Mr Hassan said. "It will continue to be a fairly patchy path for retail," he said. Retailers with an online presence were likely to do better, he said.

The outlook for business-to-business enterprises was also patchy. "Many businesses will still be in lockdown mode as far as spending goes," Mr Hassan said.

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.

"When sales shrink, cash flow becomes a very important metric for them to have confidence that their business will be around for the long run," said MYOB's chief executive, Tim Reed. "I'm very happy it makes the list, because when cash flow is proactively managed, businesses have a much higher success rate."

A lot of small businesses saw rising costs and did not feel they could pass the costs on to customers. Mr Reed said MYOB's research showed most business owners, especially small business owners, underestimated their ability to raise prices. "Often their work is highly valued by their clients, and they should have more confidence."