SME confidence rise muted as green shoots eclipsed by cost concerns

SME confidence rise muted as green shoots eclipsed by cost concerns

SMEs’ expectations around New Zealand’s economic performance over the next 12 months have changed significantly compared to this time last year, and the financial health of businesses is also on the up – but cost pressures continue to cause concern, according to new data from MYOB’s Annual Business Monitor.

The figures from the nationwide survey of 1,000+ SME owners, directors and managers, show that despite ongoing cost pressures, 37% of SME owners and operators believe the local economy will improve over the coming year, while just over one-in-five (22%) expect it to remain the same and 40% believe it will decline.

The results are a step-change on last year’s Monitor, when 69% expected a decline and just 16% expected an improvement in the economy. It’s also a slightly different picture to that seen across the Tasman, with MYOB’s recent Australian Business Monitor showing 52% of Australian SMEs expect their economic conditions to weaken.

MYOB General Manager – SME, Emma Fawcett, explains that while confidence has improved, several pressures continue to linger top of mind for local business owners.
“New Zealand’s SMEs are showing more optimism around the local economy looking ahead, but this year’s Business Monitor also shows that the cost-of-living, inflation and interest rates, followed by changes in consumer confidence or spending, and the cost of fuel and transport, are still top concerns impacting confidence,” explains Emma.

“Unfortunately, these concerns aren’t likely to fade in the short term as more mortgages are set to roll onto higher interest rates and inflation continues to take its time to drop. Some SMEs are also coming off the back of a particularly tough couple of quarters and many would have recognised a recession was underway long before the official figures were out.”

Cost pressures continue – more to hit consumers in 2024

Highlighting the scale of cost increases impacting local businesses, the 2024 Business Monitor shows compliance and overhead costs are adding to the crunch. Overall, 82% of SMEs have seen their overhead costs increase in the past year, and on average, these costs are
up $1490 per month. On top of this, for SMEs with 1-5 employees, compliance costs have increased an average of $1067 per year. This grows to an average of $2187 for businesses with 6-19 employees.

Unfortunately for consumers, as business owners seek to soften the blow to their bottom line, more than half (54%) of SMEs surveyed say they plan to increase their prices in the next 12 months. In terms of where these price rises are likely to hit the most, a majority of SMEs in the construction and trades, manufacturing and wholesale, and retail and hospitality sectors, say they will raise their prices in the next year.

Subdued revenue and tight profitability, but stable financial position

Restrained market conditions have somewhat stifled room for growth for many SMEs, with higher costs and lower demand impacting sales revenue and in turn, squeezing profitability.
Showing a little improvement on last year, the 2024 Business Monitor found that a quarter (25%) of SMEs saw revenue increase on the previous year, while 41% said it remained the same, and a third (33%) saw their revenue decline.

“The construction and trades industry has had it particularly tough over the past year, with 39% of businesses in the sector seeing their revenue decline. Unfortunately, given the drop in building consents, high construction costs and projects on hold across the sector, a drop in performance was, sadly, not unexpected,” says Emma.

“In contrast, despite lower levels of discretionary spending, more than a third (35%) of those surveyed operating in retail and hospitality reported increased annual revenue compared to a year ago.”

Profitability has also been tight as rising costs continue to bite. Just over one-in-five (22%) SMEs report that their profitability increased over the past three months – up nine percentage points on the same time in 2023, while 37% say their profitability has stayed the same and 41% say they have seen a decrease in profits.

Despite ongoing challenges affecting sales and profit, the overall financial health of local SMEs appears to be improving. An increasing number of SMEs describe their current cashflow levels as ‘good’ to ‘very good’ – sitting at 43%, up from 35% in 2023, and two-thirds (66%) of those surveyed rate their overall financial position from ‘good’ up to ‘excellent’.

Slow and steady path ahead

Looking ahead, incremental improvements for the next 12 months are in sight. Overall, 29% of SMEs believe their revenue will rise over the coming year, however, 47% are forecasting it will stay the same and 21% are predicting a drop.

In the shorter term, sentiment around profitability is tracking similarly, with 26% expecting their business will be more profitable in the next three months, while 47% expect profit levels to stay the same and a quarter expect a decline.

“Another year of hard slog for local business owners has largely tempered expectations for the year ahead, but the green shoots some SMEs have seen over the past 12 months is likely contributing to some of the optimism we’re seeing around their performance as they look forward,” explains Emma.

“Overall, businesses are keen to keep momentum going as confidence rounds a corner. While it’s not surprising that just over half of SMEs say that increasing revenue is their top goal for the year ahead, we can see that more than a quarter of local SMEs are also feeling more ambitious with the goal of growing their business, which is really encouraging.”

Employment levels ‘about right’

Following a few years of employment challenges, this year’s Business Monitor highlights small improvements in employment outlook. For what they need to operate their business successfully, 70% of SMEs say their staffing levels are ‘about right’ while 20% describe them as ‘low’, and 9% say they are ‘high’. Encouragingly, the vast majority (84%) of SME operators surveyed also plan to maintain their current employee levels for the next 12 months, while 9% are planning to increase the number of full-time employees in their business and just 5% plan to make some cuts.

For just over one-in-five (21%) SMEs, the amount they pay their employees is also set to increase this year, while two-thirds of SME owners say that wages and salaries in their business are likely to stay the same.

“With low levels of jobs on the market and murky economic forecasts, much of the workforce are largely staying put as uncertainty remains. However, local business owners also know all too well the value and importance of having the right team in place when they need to hit the ground running as conditions improve, and we hope Kiwis continue to support them as they get ready to do just that,” says Emma.

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