It’s time for the smaller end of town to get serious

April 4, 2016

SMEs are suffering – relying on outdated assets is hindering productivity and growth. If the smaller end of town wants to avoid long-term production and efficiency issues, they must act now to find a solution, writes Daniel Blizzard, Chief Executive Officer at Alleasing.

The number of Australian micro businesses and SMEs burdened by outdated assets has been rising for the past 18 months. In fact, the latest numbers reveal that the use of obsolete equipment is hurting more than three quarters of micro businesses (75.5%) and as many as eight in ten SMEs, with impacts including a lack of flexibility and stifled growth. These figures represent increases of 23.5% and 17.3% respectively since the Alleasing Equipment Demand Index began tracking the issue in August 2014.

Although we’ve been emphasising the need for smaller businesses in particular, to address the growing backlog of assets that are negatively impacting their own operation and the nation’s productivity, our research shows that they are continuing to sit on their hands. Two thirds of micro firms and 54.5% of SMEs have no plans to invest in new assets this quarter, a trend that has been evident for five quarters.

Our own data is supported by recently-released Australian Bureau of Statistics’ capital expenditure figures. The most recent trend volume estimate for equipment, plant and machinery expenditure fell 4.2% between the September and December 2015 quarters. Furthermore, the ABS’ first estimate for expected equipment, plant and machinery investment for 2016-17 is 0.8% lower than the same period in 2015-16, providing further evidence that planned investment is weakening.

In light of the fact that smaller businesses have been citing issues accessing credit for some time now – the Index data shows around 50% of micro firms are facing difficulties accessing secured finance – this outlook for investment isn’t unexpected. Add to that the new requirements for banks to hold more capital and pull back on some forms of lending, and the data suggests that business owners and managers need to find another way to access the equipment they need and prevent an ongoing drag on the economy.

With the number of corporates negatively impacted by outdated assets much lower than their smaller firm counterparts, perhaps the big end of town has some of the answers, but what are they doing differently?

First, larger firms own less. The average percentage of total assets reported as owned outright is just 5.1% for corporates, while it is 8.8% and 9.5% for micro businesses and SMEs. This trend towards asset ownership for the smaller end of town is creating a situation of locked capital. That is, capital being ploughed into equipment purchases that could be more effectively used on other areas of the business such as innovation, research and development, talent acquisition, or working capital.

Second, corporates appear to carefully consider equipment purchases as part of their broader capital management and strategic decision making process. The Index reveals that 3.6% and 11.3% of micro businesses and SMEs consider capital management a key driver of asset purchases, figures that are significantly lower than corporates at 36.5%.

It’s clear the smaller end of town needs productivity enhancing equipment to support growth. Perhaps it’s time for Australia’s SMEs to let go of their desire to own things and consider other ways to get their hands on the assets they need.

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