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Small businesses held back by a back-log of unproductive assets

December 17, 2014

Small businesses are feeling the impact of unproductive assets at a time when competition only continues to intensify. Robert Spano, Chief Executive Officer of Alleasing, examines how the engine room of our economy intends to overcome this challenge in the New Year.

Productivity is a critical issue for the Australian economy.

Treasury forecasts indicate that a significant change in the composition of our income growth per capita will occur over the next decade. The expected consequence of this shift is a greater reliance on businesses to deliver products and services in a fast and cost effective way, and this means an unwavering focus on productivity.

But, the necessary shift towards productivity requires a significant lift in investment and we continue to read reports which note that we are below trend on this metric. We also see the impact of this reality in our own research, with seven in ten small businesses indicating they are being detrimentally impacted by unproductive assets.

With our economy ticking along at below trend growth levels, it’s understandable the business community is focussed on capital preservation. But the consequence of these trends is that businesses are trying to extend their equipment beyond its useful life and finding themselves caught in a negative productivity and investment cycle.

We have all been waiting for the investment recovery to come. Some commentators have been more positive than others, suggesting that when it does come, it will be strong. This belief stems primarily from the competitive environment in which we operate and the desire for businesses to stay ahead of their competitors.

So when will the recovery hit?

Some believe it is dependent on a fall in the Australian dollar, which is likely to result in a subsequent flurry of equipment ordering from overseas. However, we don’t know when the dollar is going to fall. Encouragingly, the data we are seeing now suggests that small businesses aren’t going to sit back and wait for the decline of the dollar before they turn their focus to investment. The result – asset acquisition is on the agenda in early 2015.

Three in ten small businesses have indicated they will increase their asset base during the March quarter 2015. While this is less than the percentage of firms that indicate they are being detrimentally impacted by unproductive assets, if these intentions are acted upon, we could see a quantifiable difference in the productivity of Australia’s small businesses.

Interestingly, of those small businesses that intend to acquire assets in the March quarter 2015, four in ten plan to purchase new assets, while three in ten will purchase replacement assets. The focus is reversed for larger firms, where the emphasis is on replacement assets.

This result suggests that a combination of budget constraints, a desire not to be left behind as the battle for market shares continues to heat up and aspirations for growth are driving the small business segment to innovate. The outcome is that new assets are seen as the way forward. Positively, this approach supports a push towards greater productivity. New technologies will support an emphasis on research and development, as well as improvements in production and operational processes.

The result also demonstrates that businesses, particularly small businesses, are acting now, in a low interest rate environment, to shore up their future, with the research confirming low rates are more of a driver of acquisition plans than a business’s own budgetary cycle.

The other interesting finding, particularly in light of a stubbornly high dollar, is that the majority of small businesses (65.5 per cent) have indicated they will source their equipment locally. If this intention comes to fruition, it could have significant positive flow on impacts for Australian suppliers.

There is no question that small businesses have faced challenges over recent years and confidence has suffered as we’ve all waited patiently for the recovery to come. Positively, it appears we may have reached that turning point. Small businesses seem reluctant to sit back and wait any longer and instead are rising to the challenge and finding a way to move forward. 2015 should be an interesting year.

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

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