Taming the inflation tiger

The latest Dun & Bradstreet Business Expectations Survey is showing signs of success in the fight against inflation. Selling price expectations have reached an 18 month low following a decrease of eight points since the March quarter.

Meanwhile, the combination of high interest rates and market turmoil has fuelled executive concerns regarding the impact of the credit market on operations. With a fifteen per cent increase since the previous survey, more than two thirds (71%) of executives now expect a tightening of credit will have a negative impact on operations. This finding comes as business payment terms are blowing out and banks are tightening their lending standards amidst the continued fall-out from the US sub-prime mortgage crisis. All of these factors are making cash increasingly difficult to access.

Reflecting the impacts of lower sales volumes and higher costs, expectations for profits growth have fallen. Declining to an index of three, thirty two per cent of executives now expect an increase in profits and twenty nine per cent expect a decline.

Sales growth expectations have also declined however the index is 13 points higher than 12 months ago, with thirty nine per cent of executives expecting an increase in sales growth in the June quarter. Sitting five points above the all firms index at twenty, the net retailers’ index is particularly strong.

Capital investment expectations have strengthened significantly to an overall index of six per cent. At an index of eleven per cent, durables manufacturers are showing the strongest expectations for growth in this area.

The employment indicator has strengthened slightly, with fifteen per cent of executives now expecting to have more staff in the quarter ahead than they did a year ago; eleven per cent expect to decrease employee numbers.

According to Christine Christian, Dun & Bradstreet’s CEO, the impact of the credit crisis and higher interest rates are hitting Australian businesses.

“The surge in executive concerns about tightening credit conditions and the continued high level of unease regarding interest rates indicates that the impacts of the credit crisis have well and truly hit our shores,” said Ms Christian.

“Businesses are now operating in an environment where cash is of paramount importance yet they are being forced to deal with tighter lending standards and business payments that are more than three weeks overdue.

“Supporting the survey’s findings and indicating that executives are acting cautiously, the latest figures from the RBA show that business borrowing slowed in February; a clear demonstration that tight financial conditions and market turmoil are helping to slow demand.

“Evidence of a moderation in demand was a crucial factor in the Reserve Bank’s decision to keep interest rates on hold at its latest meeting, a move which will no doubt be welcomed by executives.”

Topping the list of concerns for the third month running, thirty six per cent of executives rank interest rates as the most important influence on operations. At seventeen per cent above the all firms index, 53% of executives in the retail sector are concerned about the interest rates.

This high level of concern is a reflection of a moderation in consumer spending.

Wages growth concerns have increased by 14 per cent since December to reach their highest level in eight months.

Twenty seven per cent of executives now expect wages growth to be the most important influence on their business in the quarter ahead, reflecting expectations that the skills shortage may result in upward pressure on wages.

Fuel price concerns have dropped sharply to the lowest level recorded by the survey. Just 15 per cent of executives rate the cost of fuel as the most important influence on operations. The impact of recent movements in petrol prices has also dropped. Down 17 per cent since February, 61 per cent of executives have noted a negative impact on operations.

According to Dr Duncan Ironmonger, Dun & Bradstreet’s economic consultant, Australian business executives should welcome the Reserve Bank’s recent decision to leave official interest rates unchanged.

“The substantial tightening in monetary conditions since mid 2007 is driving a moderation in demand growth which should take some pressure off inflation,” said Dr Ironmonger.

“Despite expectations that inflation will remain relatively high in the short term, and above the Reserve Bank’s target range, the Bank anticipates that inflation will decline over time if demand slows as expected.

“The latest D&B survey supports the view that demand growth and inflation are moderating. However, the upcoming Federal Budget will influence any decision by the Reserve Bank to adjust rates in the coming months.”

The D&B index for expected sales is down three points to 15, with 39% of executives expecting an increase in sales and 24% expecting a decrease. The profits index is down five points to three, with 32% of executives expecting profits to rise and 29% expecting a fall.

Employment expectations are up one point to an index of four, with 15% of executives expecting an increase in staff and 11% expecting a reduction. Capital investment expectations are up five points to an index of six, with 12% of executives expecting an increase and 6% expecting to cut spending. Inventories expectations are down two points to an index of zero.

The selling prices index is down eight points to an index of 45, with 50% of firms expecting to raise prices and 5% expecting to decrease them.

Business payments blow out amidst tougher conditions

Business-to-business payment terms have blown out to their highest level since 2001, increasing cash flow pressure on Australian businesses already buffeted by a shakier economic outlook.

The latest figures in Dun & Bradstreet’s (D&B’s) quarterly trade payments analysis reveal that the average payment period across all industries has reached 55.8 days.

While businesses of all sizes saw a blow out in the length of time it took to get paid, suppliers of big businesses are feeling the greatest pressure. Businesses with 500+ employees are taking 62.7 days to make payments, more than double standard payment terms and an increase of 5.6 days from the December quarter.

Despite maintaining payment periods which are more than three weeks past normal terms, small businesses were the quickest to pay. The 1-5, 6-19 and 20-49 categories took just under 55 days to settle accounts in the March quarter.

According to Christine Christian, D&B’s CEO the increase in the time businesses are taking to pay each other is placing additional pressure on company cash flows in an environment where access to credit has already tightened.

“The impact of the credit crunch and the tougher business environment is evident in D&B’s payment trends data,” said Ms Christian.

“It is clear that during buoyant economic times many companies let their collection practices slip. However these same companies were unprepared for the turn in the credit cycle and consequently are struggling to ensure strong cash flows. They have left themselves vulnerable at exactly the wrong time.”

The Communications sector is the slowest to pay at 62.2 days, an increase of 6.5 days on the December quarter. The Electricity, Gas & Sanitary Services and Mining sectors follow at 61.0 and 59.2 days respectively.

The Agriculture industry was the quickest to pay at 49.8 days, an increase of 2.5 days since the previous quarter.

Public companies continue to be slower payers than their private counterparts however the gap between the two has increased further. The public sector added 6.5 days to the time it takes to settle accounts while the private sector  jumped 3.2 days. Taking almost five weeks longer than the standard term, public companies averaged 64.5 days to pay bills in the March quarter; private companies took 55.6 days.

Examining the data by state reveals that NSW is the slowest to pay at 57.6 days. NSW saw the biggest increase of any state at 3.7 days. At 52.2 days and following an increase of 2.6 days, Tasmania was the quickest paying state.

Dun & Bradstreet’s Global Risk Report shows that Australia’s payment problems are not unique. A number of countries in the Asia- Pacific region pay a significant percentage of payments at 30 days or more past terms, with Australia fourth on the list of bad payers. In the December quarter of 2007 Australia paid 39.3% of payments significantly past terms.

According to Ms Christian, many businesses are being denied access to their cheapest source of funding – their own.

“With the credit markets effectively closed businesses are finding it increasingly difficult to source credit to invest in their business.

“With a significant portion of business failures the result of poor cash flow, any increase in payment periods could have severe detrimental impacts.”


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