New research reveals that despite strong Government stimulus and a gradual opening up of nearly all States since July, 50 per cent of businesses saw a drop in their profits this year, and 55 per cent made serious cuts to their expenses.
The findings come from a survey of an independent panel of 258 Australian business owners with employees whose businesses are still in operation, commissioned by online financial information platform Money.com.au.
The results revealed that 2020 will likely be the worst year for businesses on record. While the majority of businesses suffered a decline in profits, 35 per cent made the same profit as last year, and just 15 per cent made more profit.
This is despite the wide-scale cuts that directors made to their businesses. Among the 55 per cent of business owners who made cuts to crucial expenses, 44 per cent let go of employees and contractors, despite JobKeeper being made available to hold onto staff on payroll. A quarter (24 per cent) made cuts to their own salaries, and 24 per cent froze salaries and did not pay bonuses across their businesses.
Nearly half (45 per cent) made cuts to travel. Travel was drastically reduced at the start of the pandemic, as a result of Government restrictions and travel bans. Australia’s corporate travel services industry is estimated to have declined by 17.6 per cent.[ The cuts are likely to continue, as two-thirds of global firms in the Asia Pacific also plan to limit corporate travel permanently after the pandemic.
One third (34 per cent) of businesses made cuts to lunches and entertainment, and one fifth (20 per cent) cut back on marketing expenses.
It seems, however, that most businesses were motivated to hold onto their leased premises – even though rent is a significant ongoing business expenses, generally accounting for up to 20 per cent of operating costs. Retailers, in particular, pay an average of $12,000 in monthly rent and gym owners can be set back nearly $10,000 a month on rent. Money.com.au found that just 17 per cent of business owners cut rent expenses this year, by either moving out of the workplace or negotiating on the lease price.
Money.com.au also discovered a marked difference in the proportion of businesses that cut costs across the States. Two thirds (65 per cent) of NSW businesses made cuts, compared with 59 per cent of Victorian businesses – despite Victoria subjected to a longer and harsher lockdown – and 44 per cent of Queensland businesses. The NSW economy is expected to shrink by around 10 per cent and the State budget in Victoria is forecast to be $7.5 billion in deficit. This suggests the two States have been financially impacted the most as a result of the shutdowns and restrictions this year.
Interestingly, the data also reveals that, despite the fall in profits and cost cutting, 57 per cent of businesses did not work towards increasing their business income this year. The lack of action may be due to fears of fresh lockdowns, a motivation to remain eligible for JobKeeper (32 per cent of surveyed businesses were on the JobKeeper program), or a difficulty in finding new hires.
Licensed financial advisor and Money.com.au spokesperson, Helen Baker, says: “It is concerning that half of the businesses still in operation seem to be in survival mode – even while they made major cuts to their operational expenses. It is also concerning that this year has been so unpredictable that more than half of businesses did not bother to regain or grow their income. Very little has been known about this virus, and it was impossible to forecast whether Australia would go into a second wave and experience another lockdown or tightening of restrictions.
“A proportion of businesses might have also felt adequately supported by the Government’s cash flow boost, JobKeeper, instant asset write off and the SME Guarantee Scheme and made the decision to keep their business growth stagnant until the end of the pandemic.”
Helen says that challenges in employing new people might have been another reason for the lack of proactive growth. “Business owners may have found it difficult to find new people, based on community fears of contracting COVID-19 in the workplace. Remote working arrangements have also brought new challenges, particularly when it comes to hiring staff. The culture around working from home is not always conducive to business growth and can prove difficult to onboard and train new employees remotely.”
The full survey results, including breakdowns across organisation size, State business is predominantly based, and years in operation, can be found here: money.com.au/business-profits-and-expense-cuts-study
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