The five major issues confronting your business in 2020
Launching and operating an SME has always been a challenging way to make a living. I’m reminded of those nature documentaries where newly hatched sea turtles break through the surface of the sand and instinctively scurry for the ocean, only to be confronted by a gauntlet of seagulls and other seabirds waiting to snap them up. If the baby turtles make it past the birds, there are the sharks waiting for them in the shallows and the waves pushing them back towards the shore. One challenge after another, yet the turtles push on.
Likewise, the challenges confronting newly launched SME are many, varied and relentless. ABS figures show that around 60% of SMEs fail within three years of start-up.
According to a 2018 study by the University of South Australia on why SMEs fail, the main reason is lack of leadership/poor management followed by inadequate market research and marketing, poor financial management and underestimating the impact of externalities.
There are thousands of text books and university courses on the first three, but it is the impact of externalities that can catch any diligent SME owner off guard. Last year had the most business-impacting external issues that I’ve seen in a while and I expect 2020 to be similarly chaotic. Some of the major externalities that I see impacting Australian SMEs this year are the impact of bushfires, cyber security, government regulation/red tape, the risk of a global economic slowdown and digital transformation.
Impact of bushfires
The devastating bushfires that continue to wreak havoc, mainly in the eastern states, have severely impacted thousands of SMEs. According to the CEO of the council of Small Business Organisations, Peter Strong, more than 100,000 businesses had been indirectly affected by the fires. Many analysts have put the cost to Australian businesses at $2 billion to $2.5 billion through impacts such as lost tourism, damage to agricultural land and livestock, and loss of retail income.
Thankfully the Federal Government has announced a number of initiatives to assist SMEs affected by the fires. These include tax-free grants of up to $50,000, low-interest loans of up to $500,000 (with a ‘repayment holiday’ of up to two years) and $3.5 million to establish the Small Business Bushfire Financial Support Line.
The government has also announced that businesses in fire affected postcodes will have until 28 May 2020 to lodge and pay business activity statements and income tax returns.
Cyber-attacks on businesses have become so common that cybersecurity experts often say that it’s not a case of it, but when, your business is targeted. Not only is the incidence of cyber-attacks growing, but the sophistication of these attacks is increasing as well.
The Telstra Security Report 2019 surveyed 320 Australian IT security professionals and found that 65% of their businesses experienced an interruption in the previous 12 months. An incredible 35% of those businesses reported phishing incidents on a weekly or monthly basis.
Yet 2018 research from cyber security firm CyberArk, revealed that 45% of Australian organisations say they can’t prevent attackers breaking into their internal networks.
Engaging cybersecurity experts to conduct a cyber audit of your digital assets is a critical proactive step in ensuring that your data files, and those containing private information on clients or customers, is protected against security breaches.
Government regulation/red tape
According to 2019 Institute of Public Affairs report, regulations costs the Australian economy $176 billion per year in compliance and loss of productivity.
The Federal Government passed 61,615 pages of legislation between 2007 and 2016 according to the Institute of Public Affairs. Absorbing the cost of ever-changing regulation can take a big bite out of organisations’ profits.
Red tape is particularly onerous for SMEs, who don’t have compliance teams or the economies of scale to absorb the cost of regulation like larger businesses. Poring over legislation on OH&S, environmental standards and industry specific laws can be a significant burden to SMEs and even prevent them from getting off the ground in the first place.
Trade associations play a crucial role in analysing new legislation and making it more easily understood by SME operators. We also need them to lobby the government to reduce the amount of red tape that SMEs must contend with. SMEs are the lifeblood of the Australian economy. We should be creating efficiencies for them rather than smothering them under piles of paperwork.
Possible global economic slowdown
Weaker growth in most developed and emerging economies means that talk of a global recession is still in the headlines. The UN has forecast the lowest global growth in 10 years across 2020, saying that a reliance on relaxed monetary policy and a rise in asset prices to increase demand has produced “ephemeral growth” at best.
Although the China/US trade war seems to be coming to an end, the ongoing friction between Iran and the US is expected to contribute to slow global growth this year. Thankfully, both sides seem averse to all-out war but there remains the risk of countries beginning precautionary stockpiling of oil which would drive up the price significantly.
The Brexit saga has also had a global impact with the UK economy shrinking. The falling pound means that exports to the UK become more expensive which will impact the EU and the US$141 billion in annual exports from the US. American companies invested US$758 billion in the UK in 2018, mainly in the finance and manufacturing sectors, however many are now moving their headquarters to the EU.
Increasing the holding of cash on the balance sheet now could help insulate your business from the worst of any economic downturn that emerges this year.
Digital transformation of your business
Managing digital transformation was ranked as the number one issue of concern according to 220 business leaders surveyed for KPMG’s 2019 ‘Keeping Us Up at Night’ report.
Despite the challenges of technical innovation, business owners have no choice but to meet them head on or face being left behind by the opposition. Technology has reduced the barriers to entry in many industries, creating many opportunities for small, agile players to enter markets, redfine them, and steal share from the incumbents.
For the uninitiated, developing a digital strategy can be a daunting task. But don’t shy away from it. Questions to consider include whether digital solutions could reduce your business costs; is technology reducing the barriers to entry in your industry; and how tech solutions can improve the customer experience.
Managing cashflow shortages
All of these externalities will have an impact on an SME’s cash flow to varying degrees. Uneven cash flow can cause major problems such as the inability to pay suppliers and staff, missed opportunities and falling behind in tax payments. In extreme cases, it can even lead to business closure.
It is critical to ensure that the correct procedures are in place to maintain a healthy financial position and enable growth.
An increasing number of SME operators are turning to alternative funding sources such as invoice finance, or factoring, which don’t require personal property as security.
This has been driven by the banks’ tightening of lending policies, contraction of the housing market and the greater level of flexibility that non-bank lenders can offer.
Under the invoice finance process, up to 90% of the value of an outstanding invoice is converted to cash, usually within 24 hours. Once the outstanding invoice is paid, the remaining 10% of the value of the invoice up to a cap of $3 million is paid to the company.
By Greg Charlwood, Managing Director, Australian Invoice Finance