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Businesses edgy about gloomy global economy

Australian busiinesses are not prepared for another hit by the world economy, a study finds

October 17, 2011

More than half of Australian mid-market companies believe they are not prepared for continuing fluctuations in business conditions, according to the inaugural Commonwealth Bank Future Business Index.

One-third of businesses believe conditions will decline over the next six month, according to the study.

The bi-annual analysis, which measures the outlook for business conditions, challenges and opportunities, has a recording of minus 0.3 percent for the general outlook for the next six months.

Businesses operating in retail, manufacturing and wholesale trade are worst affected, Commonwealth Bank’s Executive General Manager for Corporate Financial Services Symon Brewis-Weston says.

“The outlook suggests that in general, mid-market companies are not confident about their position in which to weather uncertain business conditions in the near future,” Brewis-Weston says.

“The general lack of confidence we are seeing may result in a low appetite for risk and capital investment over the next six months. Despite this, activity amongst Australian businesses looks set to continue to grow, albeit a slower pace and in certain pockets of the economy.

“For those companies which take a proactive approach to management and planning, opportunity is still very much alive.”

Half of businesses expect to see an increase in revenue, with most of them anticipating the flow to increase in profit.

Although the outlook for revenue is more favourable, this will be impacted by input costs, with over half of businesses expecting an increase in salaries and wages.

Some 53 percent of businesses expect an increase in operating costs.

Businesses are influenced by not only domestic factors but also issues occurring overseas, according to Brewis-Weston, with most concerned with the economic picture in the US rather than in Asia.

“Over half of businesses said that weak economic conditions in the United States would impact on their organisation over the next six months, compared to those who identified Asia (48 percent) and China specifically (47 percent),” he adds.
Up to one-third of businesses have indicated they are looking at increasing capital expenditure and just under one-third were looking at taking on extra headcount.

Companies in the mining sector are more likely to be considering diversification, mergers and acquisitions and internal expansion, with mining, health and education sectors anticipating an increase in capital expenditure, headcount and investment.

To minimise exposure to ongoing economic fluctuations, many organisations will increase their use of hedging and debt facilities for capital investment and cash flow management – particularly in mining and transport, Brewis-Weston says.

With market conditions continuing their volatile behaviour, Brewis-Weston points to the value of proactive planning in order to help manage what lies ahead.

“Whilst businesses seem to have put some thought on how to manage future adverse conditions, it’s clear that more work needs to be done in order to effectively protect themselves. What that means is that we will need to see an improvement in the focus businesses place on managing and dealing with financial and business risk.”

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