Australian small businesses have been struggling as a result of the struggling macroeconomy. The Coversation’s 2019-20 forecasts predict that economic growth will be at its weakest since the 2008 financial crisis. Many SMEs are experiencing dips in sales, cash flow problems along with an expectation that it is about to get worse. What can they do about this?
Before touching on what can be done to assist small businesses, we will look at Australia’s economy and the threats it poses.
The Australian economy is particularly dependent on small businesses and their productive output. It comes as no surprise then that with the struggling economy, small businesses are underperforming too. Around 44% of total employment in the private sector comes from small businesses, with over half (57%) of domestic GDP coming from small to medium businesses.
This creates a cyclical problem: when there is a drop in Australia’s GDP (e.g. because foreign investment has reduced) then the likely drop in disposable income hurts SMEs a lot. The reduction in sales can cause problems in cash flow, meaning their 44% portion of employment is at risk of redundancy or wage decreases, which would further damage GDP—and so on.
Here are the key threats currently to small businesses:
- The strengthening of Asian economies. Asia is the closest continent to Australia regarding proximity, making it direct economic competition. Many Asian countries such as Bangladesh, China and India are experiencing strong economic growth, and might be dominating the export markets. Furthermore, Australia has decided to ban Chinese company Huawei’s 5G, which could hurt small businesses who could have benefited from its use.
- Climate change. Australia is a country that is particularly going to struggle with climate change, and small businesses will need to adapt to the rising sea levels and change in the resources they use.
- Technological change. This could be a threat to small businesses who do not spend enough time and resources in riding new trends and developments. Furthermore, shortages in technically skilled workers could hurt Australian SMEs.
- Struggling macroeconomy. The economy is forecasted to reduce purchasing power. This could mean that SMEs struggle with their sales – particularly products and services that are not recession proof, such as many luxury goods like jewelry and entertainment. This primarily hurts their cash flow, which is the number one reason why small businesses fail in general.
What can be done to assist small businesses?
The many small businesses that are going to temporarily struggle during the economic downwave will likely run into some cash flow problems. Cash flow problems are the number one reason for failure among small business, and so being able to mitigate this is of high importance.
This is the only real way to quickly respond to issues, because funding through equity takes too long and so does bank loans. Suddenly, accessible financing becomes one of the most important industries that can help sustain the economy, with companies like Become, a business loan engine, helping many companies stay afloat. Particularly when factoring in how important small businesses are to the growth of the economy and how many fail due to funding issues.
Another way that small businesses can be equipped to deal with the impending negative economic wave could be for the government to offer a hand. Subsidies for example can be a great way to help businesses pay for staff, with part of the wages covered at the expense of the taxpayer.
Government investment could both directly and indirectly help small businesses. For example, investment in cyber infrastructure could help small digitally-based businesses with better resources to use in order to compete on the world stage.
It can indirectly help all small businesses, though. Investment will increase economic output (AD for the economists) in the economy, which can have a knock-on effect. This could result in higher consumption spending, leading to a rise in small business’ sales.
Adapting to threats
The ability to adapt and turn the above threats into opportunities is always possible. Let’s look at the same ‘problems’ but as opportunities:
- Strengthening of Asian Economies. This could be an opportunity to take advantage of the rapidly growing middle class in Asia. This serves as a new, fast growing market, particularly when China is already Australia’s biggest export destination.
- Climate change. This could be a chance to provide eco-friendly services, or even invent new technology to help deal with climate change, as this market will inevitably be growing.
- Technological change. Use automation and AI to the advantage of the business, boost productivity and cut costs.
- Struggling macroeconomy. A chance to create a recession-proof product or service (e.g. repairs, cleaning, IT, food). This could be an opportunity to gain market share whilst other businesses struggle.