Troubled times ahead

Australia’s business executives are anticipating a bleak September quarter as high fuel prices, continued inflationary pressures and slowing consumer spending hurt sales and profit margins.

The latest Dun & Bradstreet (D&B) Business Expectations Survey reveals that businesses are expecting a steep decline in sales, profits, employment growth and capital investment, with all of these indexes now in negative territory.

This comes on the back of an increase in the number of executives reporting negative impacts on their business due to soaring fuel prices (climbing 21% since March to 82%) and more organisations being hit by a slowdown in consumer spending (up 2% in one month to 38%).

Supporting expectations that inflationary pressure will continue throughout the year, the selling prices indicator has risen five per cent to an index of fifty. Despite the increase, the index remains lower than four of the last five quarters, now fifty seven per cent of executives expect to raise selling prices in the September quarter.

Reflecting poor results in the March quarter, expectations for sales growth have dropped 33 points from December quarter highs. Forty per cent of firms saw a decrease in sales in the March quarter and the same percentage of executives anticipate a fall in sales in the coming quarter. Nondurables manufactures have been particularly hard hit, with the actual sales index falling 45 points from the December to the March quarter. Despite being the only industry with a positive actual sales index for the March quarter, durables manufacturers have also reported a negative outlook for September quarter sales.

Profits expectations have also fallen sharply, down 29 points since the December 2007 quarter. This decline in expectations is a reflection of poor March quarter results, particularly for nondurables manufacturers and retailers.

The employment indicator has hit its lowest level in 17 years. Twenty per cent of executives expect to have fewer staff in the quarter ahead than they did a year ago while just 10 per cent expect to increase employee numbers.

A significant weakening in capital investment expectations has resulted in the overall index dropping to minus six however durables manufacturers remain just inside positive territory at an index of two.

According to Christine Christian, Dun & Bradstreet’s CEO, the impacts of a slowing economy combined with high petrol prices are impacting executive expectations for the September quarter.

“Poor results in the March quarter combined with continued pressures from inflation, the credit market, high fuel prices and slowing consumer spending have led the steep decline in executive expectations for the September quarter,” said Ms Christian.

“The business community is now anticipating a rapid slowdown in activity in the coming months.

“Adding to the list of challenges, better than expected GDP results for the March quarter have fuelled speculation regarding the need for a further rate rise. Any further increase in the cost of credit will likely add pressure to a number of businesses, with SMEs likely to feel the greatest burden.”

Up nine per cent since the previous survey, credit market turmoil continues to represent a significant concern. Two thirds (67%) of firms surveyed indicated that a tightening credit market will have a negative impact on operations in the coming quarter. Ten per cent anticipate a very negative impact.

Despite the RBA keeping interest rates on hold for the past three months suggestions that rates may need to rise again to contain inflation are evident in executive concerns, particularly in the retail sector. Almost half of firms surveyed (47%) rank interest rates as the most important influence on operations in the new financial year, this jumps to 57% for retail executives.

Fuel price concerns have increased as petrol prices have continued to rise. Twenty five per cent of executives now rate the cost of fuel as the most important influence on the business in the year ahead. Meanwhile wages growth concerns have risen nine per cent to be on par with fuel prices.

According to Dr Duncan Ironmonger, Dun & Bradstreet’s economic consultant, the Australian economy has started to slow.

“Last week’s March quarter GDP numbers confirm the start of an economic slowdown. Although income tax cuts in the Federal Budget will provide some stimulus, interest rates and credit will remain tight for the remainder of 2008,” said Dr Ironmonger.

“The Reserve Bank left the cash rate unchanged at its last three meetings however it could make a further increase if demand does not continue to moderate or if expectations of continued high inflation begin to affect wage and price setting.

“Tight monetary conditions, high petrol prices and low consumer sentiment should continue to dampen consumer spending and housing construction through the next few quarters.”

The D&B index for expected sales is down 28 points to -13, with 27% of executives expecting an increase in sales and 40% expecting a decrease. The profits index is down 20 points to -17, with 23% of executives expecting profits to rise and 40% expecting a fall.

Employment expectations are down 14 points to an index of -10, with 10% of executives expecting an increase in staff and 20% expecting a reduction. Capital investment expectations are down 12 points to an index of minus six, with 9% of executives expecting an increase and 15% expecting to cut spending. Inventories expectations are down 10 points to an index of -10.

The selling prices index is up five points to an index of 50, with 57% of firms expecting to raise prices and 7% expecting to decrease them.


Businesses to greet a gloomy Christmas

The weak Australian dollar, high petrol prices and continued inflationary pressures will continue to hurt Australian businesses, the latest Dun & Bradstreet (D&B) survey has shown.

The new business expectations report indicated a bleaker outlook for the December quarter, with nearly half of all executives reporting the dramatic 20 per cent fall in the value of the Australian dollar since July had worsened their business environment.

Almost 70 per cent of executives anticipate a negative impact of the tightening credit market on their operations, while oil prices continue to pose one of the biggest challenges, with 93 per cent of executives reporting they have negatively impacted their business.

The December quarter is expected to bring a sharp fall in sales, profits, employment growth and capital investment, with all of these indexes in negative territory for the second consecutive quarter.

Selling price expectations are the only exception, projected to hit the highest level in 20 years, an index of 62, following an increase of 11 per cent.

D&B CEO Christine Christian said while business confidence for the coming quarter was set to drop to levels not seen since the 1990s, Australia was better situated compared to other countries amid the current global financial turmoil.

“Australian businesses are undoubted facing some very real challenges, “Ms Christian said.

“Profit margins are being eroded by a slowing economy and escalating funding and goods costs, while the decline in the Aussie dollar is forcing businesses to pay more for their imports.

“However, Australia’s outlook continues to be stable at a time when the economic conditions in many countries are deteriorating very rapidly. Another move by the Reserve Bank to cut interest rates should be received positively by business given its likely positive flow-on effects on spending and investment,” she said.

Business payment terms on the rise

The length of time Australian businesses take to pay each other is rising, placing additional pressure on company cash flows in an environment where access to credit has already tightened.

This finding is from the December 2007 quarter business-to-business trade payments analysis from Dun & Bradstreet collections and credit reporting agency.

The Dun & Bradstreet data shows the average payment period across all industry sectors has risen to 52.6 days (more than 3.5 weeks past normal terms) after having eased in the middle of 2007 and is now returning to the highs of late 2006 and early 2007.

Dun & Bradstreet CEO Christine Christian believes that many Australian companies have taken their eye off the ball when it comes to collecting outstanding bills and are now denying themselves access to cash at a time when credit for growth is becoming more expensive and difficult to obtain.

“During the period of strong economic growth and easy access to cheap finance, businesses have let their focus on collections slip without too much impact,” said Ms Christian.

“However, Australian companies are now entering an environment where credit is more difficult and expensive to obtain. This means there will be a greater reliance on free cash flow to fund expansion. Yet many companies simply don’t have the processes in place to maximise cash flow and have left themselves vulnerable at exactly the wrong time.”

Public companies and big businesses (500+ employees) continue to be the worst offenders, averaging 58 and 57.7 days respectively to pay their debts in the December 2007 quarter. The gap between public and private companies has jumped significantly to 5.5 days with public companies now taking 58 days and private companies 52.5 to pay their bills.

While big businesses have consistently been the worst payers, the latest data shows their payment terms are deteriorating at a faster pace than the rest of the business community. The gap between businesses with 500+ employees and those with 200-499 employees has jumped to 4.5 days and is above the long term gap trend of around three days.

Businesses with 6-19 employees continue to be the best payers when examining business size but they have seen a jump from 49.4 to 50.4 days.

State-based analysis reveals that the ACT has the country’s worst payers at 54.7 days, an increase from the September 2007 quarter. New South Wales and Victoria followed at 53.9 and 53.4 days respectively.

Tasmania at 49.6 days maintained its position as the quickest paying state, although it has seen an increase of around two days.

However, there is some good news for Australian businesses supplying the Federal Government. While payment patterns from government departments and agencies around the country have also risen to over 50 days, the Federal Government has responded positively to a proposal from Dun & Bradstreet to enforce strict payments terms among federal departments and agencies.

In a reply to the Dun & Bradstreet proposal the incoming Minister for Small Business, Dr Craig Emerson, advised that the Labor Government would implement a prompt payment policy across all its departments and agencies.

Dun & Bradstreet’s Global Risk Report shows that Australia is not alone in its payment problems but it is the fourth worst payer in the Asia-Pacific region.

India is the worst paying nation with 55.2% of payments made at 30 days or more past terms in the September quarter of 2007. In Australia 42.3% of payments are made at 30 days or more past terms.

According to Ms Christian, businesses need to ensure that they have a solid debt management policy in place. “Debt management may seem dull but having strong collection processes in place is critically important when you find you are paying interest on money being used to cover shortfalls that shouldn’t exist in the first place.”


Bleaker picture for the coming quarter

A latest business expectations survey has painted a bleaker outlook for the December quarter, with sales and profits growth expectations projected to fall further affected by the continuing high oil prices.

The survey, released by Dun & Bradstreet (D&B), indicates all indexes except selling prices will remain in negative territory for the second consecutive quarter, with 47 per cent of executives rate petrol prices as their primary concern, climbing to the highest level in 16 months.

In the June quarter, 43 per cent of businesses experienced declining sales and almost half of executives anticipate further decline in sales in the quarter ahead. The actual sales index for retailers has been hit the hardest, falling 52 points from the December 2007 to the June quarter.

The report also shows a similar picture illustrated by profits expectations, with 50 per cent of executives anticipating a decline in profits in the December quarter. 13 per cent of executives expect a decrease in capital investment, while just seven per cent anticipate an uplift.

D&B’s CEO Christine Christian said business confidence has fallen away dramatically as the economy continues to slow.

“The expectation of business executives have continued to fall, with sales and profits expectations particularly hard hit,” she said.

“These indices have fallen for two consecutive quarters, a trend driven largely by declining sales and profits results and continually escalating business costs.”

Meanwhile fuel prices continue to exert a detrimental impact on operations with nine in ten executives reporting that fuel costs are hurting their business, a 28 per cent increase since March.

The situation is expected to worsen, as 47 per cent of executives rate the cost of fuel as the most important influence on operations in the coming quarter.

“With the economy expected to slow further at least in the short term, businesses need to be particularly diligent about managing their operations to ensure they remain financially stable throughout the challenging conditions,” Ms Christian said.

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