Small businesses struggling with financial confidence: CreditorWatch

Australian small businesses are much less confident about their financial health than larger businesses, according to credit reporting bureau, CreditorWatch’s, Business Sentiment Survey released today.

The results reveal more than eight out of 10 decision makers of large businesses (82%) rated their business’s current financial health as ‘good’ or ‘very good’, compared to 76% of medium sized businesses, and just 45% for small businesses.

This is reflected in CreditorWatch’s June Business Risk Index results, which highlighted the average value of invoices held by businesses has fallen to a record low – down 49.9% over the year to June 2024. This drop was a function of decreased order values as businesses are forced to reduce inventory due to higher prices and declining demand in the economy.

Invoice payment defaults have also been trending up since mid-2021, indicating businesses are finding it increasingly difficult to pay their suppliers despite lower order values.

Less than half of small businesses confident about financial health

Small businesses decision makers are significantly less optimistic about their financial performance, current financial health, and the current business climate compared to their larger counterparts.

Only 43% of small business decision makers rated their business’s performance as ‘good’ over the past 12 months, compared to 73% for medium businesses and 79% for large businesses. Conversely, 19% of small businesses said their performance was ‘poor’ or ‘very poor’ compared to 5% for medium businesses and 7% for large businesses.

In terms of outlook on the current climate for businesses, just 31% of small businesses said the current climate for businesses was ‘good’ or ‘very good’ compared to large (70%) and medium (60%) business decision makers. On the other end of the spectrum, 29% of small business decision makers said conditions were ‘poor’ or ‘very poor’ against 9% for large businesses and 14% for medium businesses.

Financial sector leads in optimism, distribution, and retail lag behind

The research also notes which sectors are feeling more optimistic than others in the current trading environment. The financial and insurance sector demonstrated significantly higher optimism with 37% regarding business performance over the past 12 months as ‘very good’. This contrasts sharply with the distribution sector (10%), retail and hospitality (15%), and construction (17%).

The financial and insurance sector was also the most positive about the current financial health of their businesses with 68% of decision makers saying it was ‘good’ or ‘very good’. This was markedly higher than 21% of business decision makers in the distribution and travel category who rated the current financial health of their businesses as ‘poor’ or ‘very poor’, with retail and hospitality ranked second at 14% and production close behind at 13%.

These results are similarly reflected in CreditorWatch’s latest Business Risk Index, which shows the outlook for businesses in the hospitality industry has worsened, with failures forecast to increase from 7.5 percent to 9.1 percent, or one in 11 businesses, over the next 12 months.

CreditorWatch CEO Patrick Coghlan says the results highlight a stark contrast in financial optimism between large and small businesses, with smaller businesses feeling the brunt of economic pressures more acutely.

“Businesses are really hurting. They are experiencing a combination of rapid price increases, a series of interest rate hikes, and rising wage costs. On top of that, cost-of-living pressures mean that consumer demand has fallen away,” Coghlan said.

“Our June Business Risk Index showed invoice values have plummeted by 49.9% over the past year, and payment defaults are rising. Industries like hospitality are hit hardest due to their reliance on discretionary spending. Smaller businesses, operating on tighter margins and with depleted cash reserves, are struggling the most.”