Over the past year, Australian businesses have had to confront significant pressures on many fronts. Skills shortages, creeping wage bills, supply chain constraints, logistics issues, inflation and scarcity have presented a wide array of reality checks for many business owners.
As conditions hopefully start to ease later next year, what are some trends that will fade away and what should SMEs still expect to be a feature of the landscape?
1. SMEs should look forward to talent shortages easing
There have been substantial layoffs at many Tech companies internationally. Twitter, Amazon, Shopify, Netflix and Microsoft are just some of the leading firms to cut back on personnel this year, with around 100,000 tech jobs cut in the US alone over the last three months. In Australia, the number is roughly 10,000 people. As more tech companies experience pressure, SMEs that have been struggling to access these vital technology skills will be able to fill critical talent gaps next year.
Immigration will also help ease the pressure. With COVID-19 travel restrictions now over, work migrants and international students are gradually heading back to Australia. The federal government recently announced that the visa backlog, which stood at almost 1 million before the federal election, will fall to 600,000 by the end of 2022. The gaps created by talent shortages and departures during the pandemic, particularly in casual jobs and sectors such as retail and hospitality, will hopefully be filled again.
Thirdly, as cost of living pressures increase, there will also be a reduction in job hopping. The ‘Great Resignation’ has hit many companies hard, but with living costs and mortgages rising, people are likely to reprioritise job security.
So how should SMEs respond to this? First and foremost, they should focus on continuing to build their employer brand to attract the best quality talent as it becomes available. It’s also important to think about the best way to work to maximise the efficiency of the workforce. Will this be hybrid? Work-from-home? And what will the implications for this be on workplace size, location and design? Talent shortages easing is only the beginning.
2. Cashflow remains king for SMEs, but logistics and supply chain issues will continue
As supply chain issues persist, strong cash flow for SMEs will be key to creating cost advantage, capitalising on opportunity and keeping the business going.
Some SMEs have done quite well during downturns because they pre-loaded working capital. They had significantly more stock than they needed and were able to lock in prices at rates that have kept their margins at very attractive levels during tough cycles. As a result, they didn’t need to pass on all the cost increases to customers nor turn business away due to stock shortages, making them more competitive.
With supply chain issues likely to persist for another two or three years, SMEs need to understand what their supply chain will look like, be meticulous when it comes to working capital planning, and ensure that they’re pragmatically managing their investment in stock. Knowing that interest rates are expected to continue rising and that prices will likely increase, as an example, smart SME leaders will be looking at how they can leverage cash to create benefits from bulk purchasing, leveraging their order strength to drive costs down. This does, of course, mean that smart SMEs are building and managing their cash reserves in order to maximise opportunities.
Capital is also getting more expensive, with lenders and investors deploying their funds more carefully than at any time in the past decade. Funding will get more difficult to secure, so it’s advisable for businesses to think through and secure the financing they need as early as possible.
3. Climbing interest rates will require much more focus on financial positions
The Reserve Bank stated in November that it expects to increase interest rates further over the period ahead. This means SMEs need to look at how their scenario affects their cash flow and in turn the balance sheet position of the company. What is the company’s debt position? Is there enough cash to seize a new opportunity should one arrive? Is there a need to hold off on paying dividends?
Slowing customer demand due to interest rate rises might also mean that SMEs need to shift people off products or services with lower profit margins. By moving to higher-margin products, SMEs may see turnover growth flatten while still increasing profitability. Lines with a lower cost of sales also mean less cash tied up in working capital.
Identifying if there are certain customers or segments that are particularly profitable is equally important. How can you get more customers in that segment and potentially let go of some customers in another, lower-yield, segment? This will give SMEs better returns while the cost base stays the same, which all flows through to net profits. It’s crucial to learn the difference between cost-cutting as a survival tactic, and cost-saving in terms of finding more efficient ways to keep doing what you do.
The more liquid capital SMEs have, the more opportunities they can capitalise on, and the easier the conversation will be if they need to approach a bank for a loan.
History always favours long-term thinkers, so as SMEs are preparing for 2023, they need to look ahead and plan for contingencies. Know your business and be flexible and brave enough to capture opportunities as they come. In the economy of 2023, this will mean being completely across how you optimise and manage your business finances.
By Ryan Williams, Director of the Australian Centre for Business Growth at the University of South Australia
This article was first published by Smart Company