Businesses need to work smarter, not harder as customers push back on price rises
Earlypay
Australian small to medium enterprises (SMEs) need to find ways to produce more from the people, equipment and resources they already have as rising costs and growing resistance to price increases put further pressure on margins, according to Earlypay CEO James Beeson.
Mr. Beeson said productivity was too often discussed as an abstract economic problem when, for an individual business, the principle was relatively simple.
“When we hear about Australia's productivity problem, we're generally talking about labour productivity – how much economic output we generate for every hour worked,” Mr. Beeson said.
“For an SME, it's essentially the same question: how can I get more output from every hour my people work?
“Rather than asking people to work longer or harder, it's about giving them better equipment, better technology, better skills and better processes so they can produce more value from the same hour of work.”
Latest ABS figures show labour productivity was flat in the June quarter and fell 0.2 per cent over the year, while the Reserve Bank's August business liaison found increasing customer price sensitivity was limiting businesses' ability to pass higher costs on.
“SMEs can't remain reliant on increasing their prices every time their cost base goes up,” Mr. Beeson said.
“At some point customers stop accepting those increases. Businesses then have to look at what they can do differently to protect margins and get more from the resources they already have.”
Mr. Beeson said the opportunity would look different across industries.
“For a manufacturer, it might be machinery that allows an employee to produce more. For a transport company, it could be technology that improves scheduling and vehicle utilisation. For a professional services business, it could be using AI to remove hours of repetitive administration.
“The question SME owners should be asking is: what are my people spending time doing today that better equipment, technology, skills or processes could do more efficiently?”
Founder of commercial finance specialist Nexus Advisory, Stephen Mitchell, said cash pressures were pushing some larger businesses to seek finance after previously relying on their own reserves to cover the gap between spending money and receiving payment.
“We're seeing more and more businesses with a lot less cash on the balance sheet,” Mr. Mitchell said.
“Yet as tough as the economy is, there are businesses growing,” Mr. Mitchell said.
He said businesses performing well understood their costs and had avoided taking on too much debt. Investment was continuing, with more spending directed towards efficiency rather than expansion, including automation, AI and improvements to technology systems.
Mr. Beeson said Australia needed to encourage SMEs to make productivity-enhancing investments.
“The productivity dividend comes after the investment,” he said.
“Someone has to buy the machine, implement the technology or train the employee before the additional output arrives.
“The current $20,000 instant asset write-off doesn't go very far when you're talking about serious plant, machinery or automation. The government should look at stronger incentives that encourage SMEs to bring forward investments that increase their productive capacity.
“Investment in equipment also needs to go hand-in-hand with skills. Better equipment in the hands of better-trained people is where the real productivity gain comes from.”
Mr. Beeson said businesses also needed to consider how productivity investments would affect cash flow before committing capital.
“A business might invest in new machinery, technology, AI or training today, but it could take months or years before the full financial benefit flows through,” he said.
“In the meantime, the business still has to pay wages, suppliers and its other operating costs. That's why working capital needs to be part of the productivity conversation from the beginning.”
Mr. Mitchell said businesses needed to match the way an investment was funded to both the expense itself and the timing of their income. “If there is a cash flow need in a business, it’s important to get the finance that is going to match that cash flow need,” he said.
This could mean trade finance to pay suppliers, invoice finance to cover lengthy customer payment terms, or a term loan for technology investment.
According to Mr. Mitchell, some businesses were accessing unsuitable loans, adding pressure to already stretched finances.
He said funding arrangements should be reviewed over time as a business's needs and financial position changed.
Mr. Beeson said the objective should be to make productivity investments without weakening the underlying business.
“A good investment can still create cash flow pressure if it is funded the wrong way,” he said.
“Businesses need to understand what the investment will cost, when the productivity benefits are expected to arrive and how much working capital they will need in the meantime.
“If we can help thousands of Australian SMEs invest in better equipment, better technology and better-skilled people, that's how we start improving productivity across the broader economy.”
About us:
Earlypay Limited (ASX: EPY) is an Australian-listed lender which delivers flexible working capital finance solutions Australian businesses can rely on.
Earlypay has supported thousands of Australian SMEs for more than 25 years through solutions such as invoice finance and equipment finance - helping them improve cash flow, unlock capital and access a broader range of assets with confidence
Contact details:
Mark Eggleton
New Romans
0430 095 111
