TAKING STEPS
Sue Prestney's June article
Business owners take many steps throughout their business careers – some steps are big (starting the business, making major investments, selling the business) and some are smaller (changing a source of supply, buying a vehicle). All involve some degree of risk to the business and the owner personally and all can appear to be big at the time.
For a new business, taking on a first employee is a huge step. Together with renting premises it is often the first overhead of the business and the business has to be able to support it. All of a sudden there is another person, and often that person’s family, dependant on the business.
The question that business owners grapple with is whether to only take on that first employee when there is already cash flow capable of funding the cost or whether to work on the basis that the person will generate the profit to cover their own salary. The latter would result in faster growth but at the risk of incurring losses if the strategy is not successful.
The problem is that growth in turnover and growth in expenditure rarely exactly correlate.
While turnover growth may increase at a steady rate, incremental expenditure tends to be lumpy. Your turnover may grow by 5% but you can’t take on 5% of a person or grow your premises by 5%. However businesses do try to smooth out the expenditure steps, using contractors instead of employees and outsourcing warehousing to provide more flexible occupancy costs. Converting fixed costs to variable costs in this way helps to lower the expenditure steps and reduces the risk of being stuck with an overhead if growth does not continue.
But there are some steps that are more difficult to minimise and, of their nature precede growth, such as the cost of developing new products, entering new markets, acquiring new equipment and developing new websites.
Smaller businesses rarely have the resources to fund outright the acquisition of the latest technology and yet it is critical to their ability to complete in a global marketplace. Australian businesses cannot compete on labour costs but with up to the minute technology they may have the opportunity to defend their slice of the Australian market and take on new international markets. With the Australian dollar at a historical peak against many currencies, our businesses have a window of opportunity to acquire the best overseas technology at, possibly, the lowest cost ever.
This would set them up for significant productivity gains that could not only reap additional market share immediately but make them competitive in world markets especially when our dollar returns to more normal levels, as economists predict will occur over time.
The big step of investing in new technology is daunting for SMEs who are still post-GFC debt averse and paralysed by the general lack of confidence that is pervading a substantial part of our economy. In the early stages of the GFC, our government instituted a limited ‘investment allowance’ which gave businesses an incentive to acquire capital items and generated business activity. Businesses need such support now. We know government funds are tight but we need some vision – to see that such a joint investment by business and government is a way of producing future profits for both.
Other countries are seeing the opportunity. The recent Singapore budget enhanced that country’s Productivity and Innovation Credit Scheme which was introduced in 2010. This now provides a 400% tax deduction for up to SGD$400,000 of qualifying expenditure on acquisition and registration of intellectual property, investment in automation and design, research and development and staff training. Alternatively businesses can opt for a partial cash payment instead of a tax deduction, and there is a dollar for dollar cash bonus for a certain level of qualifying expenditure. Any equipment that enhances productivity and automates or mechanises the work process of a business qualifies for these benefits.
In Australia small businesses are allowed an instant write-off for assets costing less than $6,500 but this is not targeted at productivity enhancing assets and only applies to businesses with turnovers less than $2 million.
If we want businesses to take big steps in an environment of low confidence they need some encouragement. Measures such as those in Singapore send the message that the Government believes in the future and is willing to support businesses to position themselves to be globally competitive.
If our businesses do not take big steps forward my fear is that they will soon need to make quite different decisions. Only this week I met with Henry, who has been in business for 40 years but has now lost a major contract as a result of lower cost imports. Henry’s new big step is which of his long serving staff he is going to have to terminate. Henry is not alone in facing such decisions – many businesses are now having to consider defensive, backward steps.
At the time of writing, the 2014 Federal Budget had not been delivered. Despite all indications to the contrary I still hope for some measures that will encourage Australian businesses to take the forward steps that are so vital for all our futures.
Sue Prestney | EXECUTIVE CHAIRMAN MGI AUSTRALASIA
June 2013
Article written by Sue Prestney for 'Charter', the magazine of the Institute of Chartered Accountants in Australia. Sue Prestney is a Senior Partner with MGI Melbourne and current Chairman of MGI Australasia. Article reprinted with the permission of the Institute of Chartered Accountants in Australia, www.icaa.com.au