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SMEs sitting on their hands when they should be investing

March 26, 2015

 A lack of confidence in the economy has left the nation’s small businesses sitting on their hands when they should be investing, writes Robert Spano, Chief Executive Officer of Alleasing.

The federal budget is due to be handed down in May and for small businesses there is a lot riding on it. Over recent days, new information has come to the fore regarding the Government’s intentions, with a tax cut for all small businesses, regardless of whether they pay company tax or income tax, now on the table. Accelerated depreciation of assets is also on the table.

The latter is an issue that has been championed by Reserve Bank board member, Heather Ridout and the Council of Small Business (COSBOA) over recent weeks.

Ms Ridout has called for accelerated depreciation polices to bring forward investment, along with an accelerated write-off scheme for items such as computers to spur spending by small businesses. Meanwhile, COSBOA has argued that a depreciation rate of 150% would assist all small businesses, produce growth and provide significant flow-on impacts for the economy, particularly with regard to turnover of plant and equipment.

Our own research provides useful context to these arguments by highlighting the extent of the issue as it relates to unproductive assets.

More than seven in ten small businesses are being detrimentally impacted by equipment that is overdue for replacement. This figure is 12 per cent above the national average and it has risen four per cent since last quarter.

These businesses are well aware they have sweated their equipment for too long – they are also well aware of the benefits that would result from bringing new equipment online. Lower maintenance costs are top of their list, followed closely by improved productivity and business growth.

Yet despite the challenges their existing equipment is causing, they don’t have the confidence to shift into investment mode.

A mere 28 per cent of small businesses have indicated they will acquire new equipment during the June quarter 2015, leaving a gap of 44 per cent that will continue to battle on with unproductive assets.

Supporting Ms Ridout’s calls for an accelerated write-off scheme for items such as computers, our data indicates that close to one in two small businesses that do intend to increase their asset base are looking to acquire IT equipment.

So why are our small businesses so hesitant to invest?

We are operating in an environment with a low cost of capital, which should be conducive to investment, but three in ten small businesses continue to be concerned about access to secured finance.

We also appear to be trapped in a self-perpetuating cycle of low business confidence. It is evident in the timid investment expectations of our research and in Australian Bureau of Statistics (ABS) data. The recently released initial capital expenditure estimate for 2015-16 was 6.6 per cent lower than the corresponding data the year prior.

Some commentators argued that a lower dollar would be the catalyst that would spur businesses into action and result in a flurry of new equipment orders, but the dollar has come off and I believe we are still some way away from anything that could be classified as a flurry. ABS December quarter 2014 capital expenditure figures revealed a 4.7 per cent increase year on year (seasonally adjusted). This is certainly positive but we don’t have consistent growth. Examining year on year comparisons for the three quarters prior reveals declines of six per cent, four per cent and five per cent respectively.

The prospect of another rate cut in the near term exists but I am of the view that won’t be a sufficient catalyst to prompt businesses into action.

Right now, all eyes are firmly on the budget and until our small businesses see the items that are on the table put into action, investment activity will only continue to wane.

With small businesses accounting for 97 per cent offirms in Australia, the need to get the incentives right is clear. If the Government does deliver a package that includes tax breaks for all small businesses and accelerated depreciation, it may just be the shot in the arm small businesses need to stimulate investment.

 

This article first appeared on SMH, The Age, Brisbane Times and Canberra Times online.

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