Well I can’t believe a quarter of the year has gone already!! There is a broad consensus across all our clients and broader networks that we all flew into Xmas at full speed, had a short break to recuperate with family (love them or not they are still family) and then we seemed to have kicked off 2017 as busy as ever.
There seems to be a hint of cautious optimism in the economy as businesses have more opportunities on the horizon than they have had in the last few years. This was confirmed in NAB’s monthly business survey in January which reported a surge in business confidence and business conditions.
The increased commodity prices and the strong agricultural sector are the reasons for the increased confidence, my only concern is we have no control over either of these factors, one is dependent on China and the other on the weather. Coal prices have come off a bit from their ridiculous highs late last year but they are still pretty good and the recent hot weather hasn’t helped the farmers with their winter crops.
Anyway, as the saying goes ‘make hay while the sun shines’
Increase in Maintenance Activity
Another area of positivity is the maintenance activity in the resource sector. Maintenance spending was deferred over the last few years as mines got their costs and productivity under control. In 2015/16 we saw maintenance activity fall while we had strong growth in mining production.
You can only sweat your assets for so long and now the mines are starting to make money again, they are starting to have to spend on maintenance again. This will benefit mining contractors and services companies who have the skills to conduct this maintenance work.
Mergers & Acquisitions – Willing Buyers, Need Willing Sellers
There is a lot of activity In the M&A (Mergers & Acquisitions) sector, with Divest Merge Acquire (formerly Supertrac) on track for our best year on record, surpassing last year. We currently have over $75m of businesses on the market spanning from Cairns in the North to Victoria but predominantly in South-East Queensland.
I am personally getting more enquiries from potential buyers searching for good businesses to buy as opposed to sellers wanting to exit their business, this is frustrating because we represent the seller in the clear majority of engagements so I have willing buyers but I need more willing sellers.
The general view is that the M&A market will continue to be strong for the foreseeable future as the economy remains fairly stable and consistent; businesses look to grow through acquisition rather than organically and investors look to get greater returns from more active assets and take advantage of historically low interest rates.
Profit Margins continue to be tight
Profit margins continue to be squeezed as the cost of doing business continues to increase. We continue to hear about the low national wage growth in Australia but the reason wages are growing slowly at the moment was because they were too high. We are also constantly hearing about the cost of energy but no there is no clear plan or policy to rectify the situation.
We have a number of clients who are developing strategies to reduce labour costs through automation or sourcing cheaper labour off-shore. These are great strategies and examples of innovation but it does concern me how the workers who are replaced by these innovations will transition into new employment.
We also have clients who are investigating opportunities to invest in renewable energy solutions to not be so reliant on the expensive traditional electricity grid.
Big Boys – Pay your Bills!!
Cash flow management is also a major area of concern at the moment and it is predominantly due to the large corporates such as the mining companies and supermarket chains delaying payment terms to their suppliers.
It is quite common for large corporates to pay their suppliers in 60, 90 or 120 days instead of the traditional 30 days, which is abhorrent given the cash reserves these large companies have. Coles even have the audacity to ask for a 2.5% discount if they pay their suppliers on time. This policy has resulted in Australian businesses owing a record $19 billion to the ATO in overdue taxes.
There are some common strategies that businesses implement to manage their cash flow/working capital effectively:
- Know your numbers -You need to know whether you are making a profit or not. Sounds simple but plenty of people don’t know.
- Invoice your customer ASAP.
- Forecast your cash flow receipts and payments daily for the next 13-weeks.
- Negotiate extended payment terms with your suppliers.
- Only buy stock when it is absolutely needed and have a good, robust stock management system.
- Have a close relationship with your bank, they are all very supportive of funding working capital requirements and debt is currently relatively inexpensive.
All in all, 2017 has started in a much more positive light than the last few years so let’s take advantage of that.
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About the Author
Tim has vast experience in the strategic and financial management of businesses with a particular focus on cash flow and profit improvement, strategic thinking and performance reporting. He has extensive knowledge of business start-ups and acquisitions as well as exit and succession planning. Tim is an adviser with Supertrac, a corporate advisory firm specialising in business divestments, mergers and acquisitions.
Tim is a Fellow of the Institute of Chartered Accountants (FCA), Graduate of the Australian Institute of Company Directors (GAICD) and a Certified Exit Planning Advisor (CEPA) with the Exit Planning Institute (EPI).
If you have any specific questions or would like to suggest future blog topics, please do not hesitate to contact Tim on email@example.com.
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