How did SMEs feel about 2016?

The last year was challenging for many businesses, with flow-on effects from Brexit and the Australian and US elections leading to uncertainty across a range of industries. However, many SMEs are feeling positive about the new year.

Despite the pinch felt across various aspects of the Australian economy, many SMEs ended the year in positive territory, with the latest Westpac-Melbourne Institute SME Index (SME Index) reading 100.7 in December.

The SME Index, measured quarterly, is a useful tool in assessing the economic health of the SME sector, and is calculated as the average of two sub-indexes based on reported business conditions over the last three months and reported expected business conditions in the next three months.

With SMEs being the fastest-growing segment of Australian business, representing 96 per cent of Australian businesses, the health of this sector is critical to the growth of our nation. When SMEs thrive, we all thrive.

Over the course of 2016, confidence among SMEs has fluctuated. The first index for 2016, in March, sat at 97.0, revealing a degree of uncertainty at the start of the year. The dip in confidence in the first quarter was reflective of the time of year, with many SMEs coming off seasonal highs over the holiday period. SMEs reported increases in costs and in the price of goods and services, with a net balance of 48.5 per cent and 46 per cent respectively, which appeared to weigh on the minds of business owners.

A person crossing off dates on a calendar. Their pen is pointed at the 31st day, which has not been crossed yetWhile SMEs were feeling subdued about business conditions in the first quarter, they felt slightly more optimistic looking to the next three months.

The looming budget announcement in May positively influenced the confidence recorded in the March SME Index, as it was of particular importance to the sector given the leadership change and the prospect of an election, as well as the speculation on potential policy changes, particularly in taxation.

The beginning of 2016 saw increasing volumes of e-commerce, with one third of SMEs with a digital presence reporting growth in online activity, demonstrating the surging demand for online accessibility.

The strong uptake of technological solutions continued throughout the second quarter, with 47 per cent of SMEs planning to implement new technologies over the following six months. The SME Index in June showed that business owners were putting in more hours and turning to technology to reduce the burden of mundane tasks such as administration.

Despite this, the stress of end-of-financial-year (EOFY) procedures heavily burdened SME owners and had a negative impact on their confidence.

The June quarter saw the lowest index reading of 2016, at 83.0. The SME Index underlined a particularly trying quarter, as SMEs came under even more intense pressure than usual, most likely due to subdued consumer spending and a notable increase in competition.

With EOFY approaching, SMEs experienced declines in business activity, sales, profit and employment levels because their resources and time went into bookkeeping and payroll.

The vast majority of business owners reported a rise in overheads and costs in the second quarter, and also an increase in working hours during this period (31 per cent), which further emphasises the stress felt by SMEs while preparing for EOFY.

By mid-year, 2016 was shaping into a rather testing year for SME owners. Nonetheless, business confidence took an upward turn in the third quarter, with the SME Index jumping to 95.6. The uplift in business optimism highlighted improving business conditions moving into the new financial year, brought on by RBA interest rate cuts and the 1 July company tax cuts introduced in the federal budget, encouraging business growth.

Mentorship is a key element in the development and growth of a business, but surprisingly the September index revealed that over 80 per cent of Australian SMEs did not have a business mentor.

As the year moved into its fourth quarter, business confidence rose again. The SME Index in December broke into positive territory at 100.7, surpassing the 100 neutral mark for the first time in 2016. This may reflect the lead-up to the holiday period, a particularly profitable season for many retailers and hospitality businesses, with reported increases in sales and business activity such as investment spending.

While Christmas can be a profitable period for businesses in hospitality and retail, the holiday period can also be a challenging time. Our customer insight panel highlighted concerns and challenges regarding cash flow, because business activity slows down and many suppliers close over the holidays.

Interestingly, the December SME Index found that one in three SMEs with an end-of-year strategy to tackle cash flow challenges feel more optimistic than those without.

From those surveyed in the fourth quarter, more than half reported that their business did not have a strategy in place for the holiday season; therefore, it couldn’t be more evident that planning ahead is critical for businesses to remain in control and continue feeling confident into the next year.

Julie Rynski, WestpacLooking to 2017, SMEs outlined their goals for the new year as revenue growth, retaining customers and increasing business efficiency. With one eye on the new year, it’s imperative for SMEs to review and assess areas of improvement to make meaningful changes, since planning and preparation can be key factors to achieving goals and keeping ahead of competitors.

The new year is a time to reflect on the year that was and what we can do better in the future. It’s a prime opportunity for SMEs to implement new processes to manage seasonal fluctuations, and to check in with their business bank or financial adviser to discuss solutions that will help them reach their goals for the year ahead.

Julie Rynksi is the general manager of SME business banking at Westpac.

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