The economy is picking up, is your business ready to take advantage?
Australia’s economic recovery continues to gather momentum following the events of 2020, as the vaccine rollout and the broader return to work supports a continued rise in consumer and business confidence.
However, according to a long-running tracker of the impact of the pandemic on Australian small and medium businesses^, 57% of businesses still report lower revenues than they experienced before COVID-19 arrived.
The same study found the vast majority of businesses remain cautious when it comes to capital investment and staffing, but around one in five are starting to increase their spending in both these areas.
As economic green shoots translate into tangible business activity, the ability to move quickly and flexibly to meet customer needs, and capitalise on a commercial opportunity, comes into sharper focus. In fact, getting this right can be a growth-defining competitive advantage.
Having the infrastructure to grow
One of the key aspects of making sure a business is ready to exploit opportunities as they arise, is having ‘business critical assets’ in place to support operational execution. This includes the right plant, equipment and vehicle fleets, through to IT and AV systems.
As many businesses are waiting for further visibility before making capital investment decisions, this delay can put them at a disadvantage, particularly if their competitors can move more quickly.
This impacts industries differently. For example, we have seen construction businesses urgently seek to purchase or upgrade equipment to capture work and then encounter lengthy delays in the supply chain when trying to secure those key items.
In the professional services sector, digital service delivery is crucial, which requires having good quality video conferencing systems and digital collaboration spaces in place.
Matching investment in assets with cash flows
Given that many businesses are still navigating uncertainty and revenue pressures, considering the alternatives to paying cash upfront for the business-critical assets they need, is wise.
Particularly where an asset may depreciate over a two or three year lifespan, preserving cash or allocating it to working capital, can provide greater operational flexibility when it’s required for replacement or expansion.
To achieve that, businesses can consider the benefits of funding equipment over the period of its useful life. For example, IT equipment could be funded over a two to three year period, or a piece of heavy machinery over a longer period. Given these assets are used to generate cash flows, businesses can match the amount of cash generated to the repayments for that equipment.
The structure of the funding can also be considered in the context of the business objective. For example, if a business knows it will hold onto an asset over the long term, a chattel mortgage structure may work best. That way the business owns the asset at the end of the term.
For others, where they may not need to keep the equipment long term, considering a rental or hire contract may be more suitable. Third-party hire can be expensive, and in these scenarios, it is worth considering the benefits of an operating lease with a financier which can save costs and provide flexibility to return or purchase other equipment if necessary.
The questions for businesses are: Do they need to own and continue to build equity into certain business critical assets? Does the way that an asset is funded match the income it generates? Whether you are mining gold or delivering a service, ultimately the efficient use of often scarce capital, generates the highest return.
The market is operating at multiple speeds, depending on which industry you are in. The stark difference between online retailers and the international travel industry, illustrates these differences.
As normalcy returns and the economic recovery continues, being ‘business ready’ has renewed importance. Having the flexibility and the infrastructure to move on opportunities quickly, may prove to be the difference between winning or losing valuable commercial opportunities.
To understand what finance options are available for your business to further enhance its flexibility, get in touch with our team of asset finance specialists to learn more about how we can support you and your business.
^COVID-19 SME Research Tracker, ACA Research, 26 February 2021. https://www.acaresearch.com.au/australian-market-research-blog/challenging-business-conditions-as-weak-revenues-continue-for-57-of-smes