Businesses will encounter ongoing challenges for the remainder of the year, but data in the latter half will offer a more defined outlook.

Australian businesses are currently grappling with a significant margin squeeze in 2024 due to various factors. This includes rising interest rates, escalating cost pressures such as insurance, fuel, rents, and wages, ongoing disruptions in the supply chain, dwindling forward orders, and reduced consumer demand. These challenges are collectively impacting the profitability of businesses.

According to CreditorWatch’s Business Risk Index data for February, invoice defaults have reached record highs, and the values of invoices have dropped significantly compared to pre-COVID levels. This trend suggests that cash reserves are dwindling, and profit margins are under increasing pressure. As a result, more businesses are experiencing cash flow issues, making it harder for them to meet their own payment obligations to suppliers. Additionally, businesses are cutting back on order sizes and reducing inventory levels, which has ripple effects throughout the supply chain.

Given this scenario of historically low consumer and business sentiment, how will businesses navigate these challenges in the coming months?

Mid-2024 should provide some clarity on when business confidence is likely to return

CreditorWatch’s Business Risk Index, along with its various data sources, forecasts a challenging year for businesses in 2024. However, there is optimism that by the end of the financial year, there will be a clearer understanding of when business conditions might improve. The turning point in trading confidence is expected to be influenced by the first rate cut from the Reserve Bank of Australia (RBA). This anticipated rate cut is projected to instill confidence in businesses, leading to increased hiring, investments in technology, and taking on more debt to stimulate growth.

Small businesses are on a path to rationalisation

Greg Moshal, CEO of Prospa, highlighted the significant rationalization that occurred among small businesses in 2023 due to rate increases and inflation. This outcome was expected, considering the substantial growth experienced by many small businesses in 2021 due to heightened consumer spending. However, as revenue increased, so did costs, leading to a squeeze on overall profitability for these businesses.

Currently, SMEs are primarily concerned about the rising costs of goods and services (58%) and reduced customer spending (36%). Despite these challenges, SMEs remain resilient, continuously innovating and seeking ways to improve profitability. This includes investing in growth and taking on business debt.

Industries tied to discretionary spending and those with multiple subcontractors, fixed-cost contracts, or escalating costs for raw materials continue to face significant challenges. However, businesses that have managed to reduce costs, streamline operations, or consolidate their workforce with top talent, particularly during a period of historically low unemployment, are best positioned for growth in 2024.

Through it all, Australians remain fiercely loyal to their mortgages

Interest rate increases have had a disproportionate impact on Australian consumers and small to medium enterprises (SMEs) with mortgages. Despite this, individuals have prioritized paying their mortgages at all costs. Sebastian Watkins, COO of Lendi Group, has highlighted the interesting ripple effects this has caused across the market, particularly in less familiar ways such as the shift in how lenders assess loan serviceability for refinancing customers. He also suggested that the business and government sectors have not fully recognized the mental health implications of mortgage stress. As people divert spending from other areas of their lives to meet mortgage repayments, Lendi anticipates seeing the mental health impact of this trend in 2024.

SME and consumer expectations are driving new opportunities for fintechs

As data becomes more accessible, thanks to initiatives like the Consumer Data Right (CDR), fintech companies serving small business customers have an opportunity to leverage this data to deliver highly engaging experiences that align with consumer expectations. This will lead to the emergence of new offerings that simplify the lives of business owners and save time by providing greater visibility into both their personal and professional finances.

Australian businesses, especially SMEs, continue to demonstrate remarkable resilience. There are ongoing discussions on how the fintech and business sectors can innovate and expand in 2024. The first half of the year presents a favorable opportunity for businesses to evaluate their resource utilization and prepare for robust growth when more favorable conditions arise in the latter part of the year.

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