Mid-market companies look to expand

Mid-market companies looking to expand operations despite uncertain economic conditions, according to Commonwealth Bank Future Business Index.

March 29, 2012

Mid-market companies are increasingly looking to expand their operations despite uncertain economic conditions, with capital expenditure and staffing levels both set to rise, according to the latest Commonwealth Bank Future Business Index.

The second edition of the Index rose markedly to a score of 9.3 over the six-month period, up from -0.3 in September 2011, with companies recording a far more confident outlook for business conditions over the next six months and citing strong expectations for increases in revenue.

The Index is a bi-annual analysis of the views of financial decision makers in companies with a turnover of $10-$100 million, measuring their outlook for business conditions, investment plans, business challenges, projected revenue and how prepared they are to navigate future volatile conditions.

Consistent with recent reports, performance across sectors and states remains patchy, however, all areas recorded positive increase from the September Index.

Business services (20) and health and education (18.7) were found to be the strongest sectors, with manufacturing (-1.7), retail (-1) and wholesale trade (5.7) posting the weakest results.

On a state view, WA’s results further strengthened, ranking first with an Index score of 14.7 (up from 5.7), followed by NSW, which saw a large jump to 14 from 0 in September. Victoria/Tasmania was the weakest performer, however, moved to positive territory, also registering a noticeable increase to 4 from -7 six months ago.

According to Symon Brewis-Weston, Commonwealth Bank’s Executive General Manager of Corporate Financial Services, the latest findings are a clear sign that confidence is returning to the market.

"We’ve been on wobbly ground for some time, however, businesses are showing us that it’s not all doom and gloom and are adopting a much more bullish attitude than has been seen previously," he says.

"Appetite for investment is on the way up; the fact that businesses are looking at this over a six-month time horizon also shows they have more conviction about the direction they want to take. This shift in attitude comes against the backdrop of continuing change in financial markets and at a time when cost pressures remain relatively high.

"What this means is they are prepared to look at expansion despite the challenges that are still confronting them. Many mid-market companies have been sitting on sizeable cash reserves for some time and it’s clear they are now re-visiting original investment plans that had been put on hold."

Almost half (49 percent) of businesses expect their revenue to increase over the coming six months, with a similar figure (44 percent) indicating this will flow on to an associated increase in profits. On net balance, both revenue and profit expectations are up 8 percent since September.

More than one-third (38 percent) say they expect to increase capital expenditure, up 12 percent on net balance, with roughly one-third (31 percent) saying they expect to take on new staff over the next six months, up 5 percent on net balance.

Despite seeing a 6 percent drop from September 2011, rising energy costs (69 percent) remained the biggest factor impacting organisations, followed by fuel costs (65 percent) and rising wages (59 percent). Increased domestic competition was also front of mind, with almost half (47 percent - an 8 percent rise) of businesses saying this will impact their organisation over the next six months.

Organisations continue to remain wary of the impact from any economic slowdown in Asia, with more than half (51 percent - an increase of 3 percent) believing this was the biggest factor to affect their organisation over the coming six months. The impact from the debt crisis in Europe is of equal concern (50 percent - an increase of 8 percent), however, more are now optimistic about economic conditions in the US, with a 9 percent drop in those businesses which felt it was a key factor likely to impact them (45 percent).

Attitudes towards risk management stayed consistent with September figures, with less than half (43 percent) of organisations claiming they are well prepared for fluctuations in business conditions over the next six months. Of those that were well prepared, there were 22 percent that said this was due to a strong financial position. Almost one-fifth (17 percent) of these organisations also said they were well prepared due to forecasting in place to anticipate future conditions.

Interestingly, more than two-thirds of businesses (70 percent) said they had implemented initiatives to enhance efficiency and/or productivity in the past six months. Companies identified the main driver (44 percent) as the need to consolidate their financial position, followed by 19 percent which said it was to strengthen their position in the market and 15 percent which did so to measure against market uncertainty.

"This piece on productivity is extremely important and it’s clear that businesses are getting smart when it comes to counteracting outside market forces," Brewis-Weston says.

"The Index also shows a slight increase in those businesses looking to diversify their strategy. This, combined with efficiency and productivity, will be key moving forwards. In the face of slower market conditions it is these sorts of companies that will set themselves apart from the broader market and continue to thrive."

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