SME debt levels concerning despite positive business outlook

New research from Prushka Fast Debt Recovery has revealed a mixed economic outlook for small businesses, with business confidence on the rise despite SMEs feeling the economy has negatively impacted their business.

Prushka’s Canary in the Coal Mine survey, responded to by almost 600 SMEs from across Australia, found 65.4 per cent reported some level of business confidence now, up from 46 per cent six months ago, with 50.6 per cent saying they were aiming for growth in the coming year.

Despite the overall positive environment for businesses, there is an undercurrent of uncertainty about the future, with 46.7 per cent of respondents feeling the economy has had a negative impact on their business. Respondents seem lulled by the almost never-ending economic growth of the economy.

The key areas of concern reported by businesses were profitability (51 per cent), cash flow (41.9 per cent) and competition (27.7 per cent). This pessimism was due not to a lack of orders but a lack of profit margin due to competition.

The generally positive economic environment has meant that even weaker businesses have survived, further increasing competition.

Technology has a large part to play by boosting productivity and allowing access to larger markets. This has increased the number of players in most sectors, while at the same time reducing operating costs, enabling SMEs to reduce prices to win business.

Almost half (41.5 per cent) of businesses reported that collecting debts had become more difficult in the past year, and more than a quarter said they were spending longer on debt collection. Despite more time and effort going into trying to recover debts, 46.8 per cent of businesses said their debt levels had remained unchanged in the past year.

It’s disturbing to note that despite debt collection taking longer and getting harder, overall debt levels are remaining unchanged or slightly on the rise. This could have dramatic ramifications. If debt collection is becoming more difficult and the economic situation then worsens, there may be a significant spike in outstanding debts. Alarmingly, 62.8 per cent of businesses are waiting over 90 days before referring debts to a collection agency.

The easiest way to reduce SME debt levels is to pursue them earlier. We see a clear correlation between the age of debt being referred and the chances of it becoming a bad debt. In reality, debtors who haven’t paid at 80 days are unlikely to pay at 90 or 100 days.

The other step is to make sure businesses use the time they spend on debt recovery wisely. While technology can be a time saver, making personal follow-up calls to debtors with outstanding accounts – time consuming as it is – can significantly improve the percentage of invoices kept within acceptable limits.

Roger Mendelson, CEO, Prushka

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