JPAbusiness 2015 Business Forecast

2015 Business Forecast: A year of challenges and opportunities

Contributors: Justin Fabo, ANZ David de Garis, NAB James Price, JPAbusiness

Table of Contents

Introduction ........................................................................................................... 3

Chapter 1: What is the outlook for the Australian economy in 2015? ..................... 4 ANZ’s key forecasts for 2015 ........................................................................................................................ 4 Downside risks for the Economy and SMEs in 2015 ........................................................................ 12 Opportunities and upside risks for the Economy and SMEs in 2015 ........................................ 13 Overview of the Australian economy in 2015 ..................................................................................... 14

Chapter 2: What is the outlook for the international economy in 2015? ............... 15 How do you expect the international economic outlook to impact Australian business?18 What does the Free Trade Agreement between Australia and China mean for business in 2015? ..................................................................................................................................................................... 20 What are the major opportunities for Australia in 2015? ............................................................. 22 What are the major risks for Australia in 2015? ................................................................................ 22

Chapter 3: A year of cautious optimism for SMEs ................................................. 24 Doing business in a new environment ................................................................................................... 26 JPAbusiness case study – A cautionary tale .......................................................................................... 27

Chapter 4: Growing your business in a volatile environment ................................ 30 Laying the foundation for future growth ............................................................................................... 30 Time to take stock ........................................................................................................................................... 31

Disclaimer: The information contained in this eBook is general in nature and should not be taken as personal, professional advice. Readers should make their own inquiries and

obtain independent advice before making any decisions or taking any action.

jpabusiness.com.au +61 2 6360 0360 3

Introduction Welcome to our second annual JPAbusiness Business Forecast eBook.

This year we welcome back Justin Fabo from ANZ and introduce David de Garis from NAB.

We’re very fortunate to have these leading Australian economists sharing their views on the economic outlook for 2015 and beyond.

In Chapter 1 Justin answers our questions on the Australian economic outlook, while Chapter 2 sees David explain NAB’s forecasts for the wider international economy in 2015.

In our final chapter JPAbusiness managing director James Price discusses the implications of these forecasts for small to medium-sized enterprises.

Here’s a brief introduction to our guest contributors:

Justin Fabo is Head of Australian Economics, Corporate and Commercial within ANZ’s Australian Economics team. Justin specialises in macroeconomic forecasting and research, including on the labour market. He provides key strategic commentary on the Australian economy, including on the corporate segment operating across the economy.

David de Garis is Director and Senior Economist, Markets, at National Australia Bank. David speaks on the economy and markets with clients ranging from the bank’s agribusiness and corporate clients, to institutional clients at home and abroad. This interchange of ideas with clients provides him with an invaluable source of timely information ‘from the coal face’.


Chapter 1: What is the outlook for the Australian economy in 2015? Comments by Justin Fabo ANZ

ANZ’s key forecasts for 2015

• Aussie dollar – US 82 cents by the end of 2015 • Interest rates – 2.5% (RBA cash rate) • Business investment – down 5% (includes mining and non-

mining, adjusted for inflation) • Business credit growth – 4% • Overall household consumption – up 2.6% • Wages growth – 2.6% • Employment growth – 1% • Inflation – 2.5%

What is your forecast for the AUD in 2015?

We're forecasting 82 US cents by the end of 2015 – we’re not far off that at the moment (82.36 US cents, mid-December 2014).

The currency has fallen a little faster than we expected in recent months after several months of unusual stability.

The risks to our Australian dollar forecast are skewed to the downside.

The background is that we’ve been forecasting a depreciation of the Aussie dollar against the US dollar for a while, and the key reason is our falling terms of trade, which is largely driven by commodity prices (see Figure 1).


Figure 1: Real trade weighted index and terms of trade

Source: ABS, RBA, ANZ Research

We’ve seen a lot of weakness in the prices of Australia’s key commodity exports, particularly iron ore – more weakness than ANZ and most other forecasters expected – and we’re not expecting much bounce-back in 2015, if any.

In fact, over the next year our terms of trade are expected to weaken further, so as a fundamental driver of the currency’s value we could see some more modest weakness in the currency.

One issue for small to medium-sized enterprises is the volatility that has come back into the currency market.

While volatility has been pretty low across all markets for some time, it has picked up in the currency markets in recent months and our guess is it will pick up more in 2015.

The Australian dollar could trade in a 10 cent band or more over this year, between 75 to 85 US cents, or even wider. For individual businesses, depending on their needs, timing of payments, receipts and so on, that factor is just as important to consider as an average, year-end forecast.

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The volatility will be caused by US interest rates heading higher in our view. Most people expect that, but when it actually happens we think it will instill a bit more volatility in markets.

What is your forecast for Interest Rates in 2015?

This one is a bit controversial at the moment (mid-December 2014). There is a shift happening in the market and among some other financial houses out there, but ANZ’s view is we’ll see the RBA official cash rate on hold at 2.5% for nearly the whole of 2015.

We believe the RBA will start to slowly increase the cash rate towards the end of 2015, but there is a risk they won’t start that process until into 2016.

If you look at what the market is expecting – rather than what economists are expecting – pricing indicates an anticipated rate cut of 25 basis points (or one-quarter of a per cent) by about April 2015.

That’s food for thought. Our view is that the market’s expectation is overdone but the potential for further policy easing is certainly where the risks lie around our forecast.

What is your forecast for Business Investment in 2015?

Any consideration of business investment needs to be split into mining and non-mining, because these sectors are doing two very different things.

Mining investment has been falling for at least 18 months and, while it has fallen by around 20% already, it has a way to go as investment on the handful of massive LNG projects wind down. Mining exploration expenditure has also weakened very sharply amid weaker commodity prices. Falling mining investment will be a drag on GDP growth for some time (see Figure 2).


Figure 2: GDP growth forecasts

Source: ABS, ANZ Research

There are few bright spots in terms of resources investment as commodity prices are not expected to improve much, if at all. One important reason for this is that growth in China – the key consumer of many hard commodities – is slowing.

There will, however, be opportunities for businesses engaged in operating and maintaining the large liquefied natural gas (LNG) projects. Ongoing expenditure is expected to be significant over a number of years but it won’t be on the same scale as opportunities during the shorter construction phase which is now winding down.

In terms of non-mining business investment, we’ve seen some gradual pick-up in the past few quarters from weak levels, which is encouraging, and the business surveys are saying we should see some further pick-up.

While manufacturing firms continue to wind back their investment, positive signs have emerged in a range of services industries. Many firms will need to increase investment spending just to offset depreciation. We are seeing that investment in software has remained strong.

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Given that firms are likely to remain focused on costs, investment in equipment that saves money and improves productivity will be vital.

The key risk to the outlook for non-mining business investment is that other demand in the economy doesn’t strengthen sufficiently to encourage businesses to invest more (see Figure 3).

Figure 3: Growth in non-mining business investment and household consumption


Total non-mining business investment is larger than mining investment, but the rate at which mining investment is falling is not being offset by the pick-up in non-mining investment.

This is a challenge and it’s going to take a couple of years to play out.

Total business investment (includes mining and non-mining, adjusted for inflation):

• 2014 – expecting fall of 4.25% (three-quarters of data collected)

• 2015 – forecast fall of 5%

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What is your forecast for Business Credit in 2015?

We have a bit more positive news here as business credit growth has been picking up, although to date it has mostly been around property transactions, not so much for borrowing to invest in physical capital.

We’ve forecast growth of 4% which is pretty modest, but it is expected to pick up through the year, so there may be a bit more strength towards the end of the year.

The key reason is we expect the property transaction side of things to remain robust, and we do have a gradual further strengthening in non-mining business investment which will require funds.

Business credit growth:

• 2013 – 1.25% growth

• 2014 – expecting 3.5% growth

• 2015 – forecast 4% growth

What is your forecast for Overall Household Consumption in 2015?

We’re looking at another year of fairly modest household consumption growth and the main reason is that income growth will be pretty soft.

Jobs numbers might be slightly better, which will support income growth a little, but we also have the falling terms of trade. The mining sector cops most of that impact, but it does eventually feed through to households and businesses.


While household consumption did pick up a little in 2014, we’re still below average.

Overall Household Consumption Growth (adjusted for inflation):

• 2014 – expecting 2.5%

• 2015 – forecast 2.6%

When you think about the fact we have fairly robust population growth of about 1.75% (so consumption should be growing by about 1.75% even if per capita spending doesn’t change) it makes the figures look even softer.

One controversial issue when looking at household consumption is ‘wealth effects’ from rising asset prices. As house prices rise they should have some positive impact on confidence and consumption, but there is debate about just how much impact.

The wealth effects don’t appear that strong these days, because we don’t have the ‘credit tailwind’ we had before the global financial crisis (GFC).

You need that willingness to borrow for rising asset values to translate into stronger spending growth and that has certainly changed since the GFC.

What is your forecast for Wages in 2015?

We’ve seen a pretty sharp slowing in wages growth since mid-2012, with quite a bit of spare capacity in the labour market and cost cutting by business. So while we don’t anticipate a further slowing in wages growth in 2015, we also don’t see any pick-up.

The key measure is the wage price index. It grew at about 2.5% per annum in 2014 and we expect a similar rate in 2015.

The important thing here is that with inflation running at about the same rate, or a little lower, we’re actually looking at no ‘real’ wages growth after accounting for price rises.


The commodity boom produced a long period of strong real wages growth but now that’s over, and with the falling terms of trade in particular, we see a reasonably long period of minimal real wages growth.

Indeed, the 25% fall in the terms of trade we have witnessed already has coincided with no real wages growth in the economy and little growth in hours worked by employees (see Figure 4).

Figure 4: Terms of trade, wages and hours worked


What is your forecast for Employment in 2015?

Employment looks like being a bit of a mixed bag again in 2015, but overall is likely to remain soft at best.

The resources sector will be one of the key job shedders as mining investment projects wind down, but on the flipside some of the labour-intensive parts of the economy like construction and tourism-exposed sectors should get a boost.

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The indicators are looking a bit better for employment in coming months, but for 2015 as a whole we’re looking at employment growth of about 1%.

In 2014 it was about 1% too. Given that the working age population is growing a little faster than 1.5%, that’s still pretty soft.

What is your forecast for Inflation in 2015?

Inflation is just not an issue at the moment and we don’t think it will be for at least another couple of years.

The Reserve Bank of Australia (RBA) has their target band of 2-3% annual inflation and we’re probably looking at the middle of that for 2014, about 2.5%.

This year it should be about the same or a little lower, depending on which measure you use. If you focus on what’s called the ‘core measures’, we’re looking at about 2.25% inflation for 2015. Headline inflation is expected to be a little higher at around 2.5%.

The key reasons are sub-trend output growth, low wages growth and a lack of pricing power in most industries.

Downside risks for the Economy and SMEs in 2015

A key downside risk for everyone in Australia is commodity prices. The key thing to watch here is China.

It can be hard to communicate to households and small business owners how this affects them, but one way is to reflect that – at the household level – we no longer get that tax cut every year that occurred for around six years in a row as commodity prices were booming. Instead we’re seeing the reverse in terms of bracket creep.

When commodity prices were rising they increased government revenues more than expected and a lot of that was delivered back to the household sector through tax cuts and increased payments, which benefited small business through people spending more.


We're clearly in the reverse of that pattern now.

As commodity-related tax revenues fall more than expected it increases pressure on governments to collect more revenue elsewhere and also to cut spending.

Government revenue has come in weaker than expected every year since the GFC and the risk is that situation will continue. That affects everybody.

Opportunities and upside risks for the Economy and SMEs in 2015

1. Lower currency impacts – The lower Australian dollar will provide advantages to some of our exporting firms. It should also benefit tourism businesses and other businesses that compete with imports. For example, a client of ours who manufactures steel products told us that once the currency started dropping a couple of months ago, they saw an immediate positive change in orders coming through.

2. Residential property construction and housing-related industries – We’ve seen a big ramp-up in residential construction and normally that would peter out as interest rates go up.

However, there is strong underlying demand for new housing from the population growth we’ve seen, the RBA has told us they would prefer the level of residential building activity to remain high, and we have a view that interest rates will be low for a long time.

All this means the normal boom-bust cycle we go through in housing shouldn’t be there this time, or at least substantially diminished. Our best guess is that sector should maintain the current high level of activity for some time.

3. US recovery – There are signs of recovery in the US economy and, historically, a healthy US is good for Australian business.

Both NSW and Victoria have pretty big finance sectors – about 14% of the state economies – and they have strong financial linkages with the US.


The US is still the biggest foreign direct investor in our economy by miles – they own a lot of our businesses – so if things are better on the home front that could translate into better capital expenditure intentions in their businesses here.

There is also the confidence impact. Increased confidence in the US economy can lead to increased business confidence and, to an extent, consumer confidence here.

The other more indirect upside risk is that a healthy US economy is good for global growth because it is a big source of investment, particularly in Asia. That indirect trade link through Asia is important for Australia.

Overview of the Australian economy in 2015

‘Challenging’ is how I would describe the economy going forward.

We know mining investment still has a long way to fall and will be a drag on growth and there are key questions about how quickly the other parts of the economy will pick up.

Non-mining activity is still growing below average but it has picked up noticeably over the past year or so, so that’s a good start.

It just needs to grow above average for two or three years to offset the drag from mining investment. The key question at the moment is ‘can it do that?’ We obviously have a little more confidence than others i.e. those calling for rate cuts, but it’s just a forecast at this stage.

Some reasons for SMEs to be confident is the lower currency, for some, and a relatively prolonged period of elevated residential construction and housing sector activity.


Chapter 2: What is the outlook for the international economy in 2015? Comments by David de Garis National Australia Bank

What is the economic outlook for China in 2015?

Australia is increasingly tied, in an economic sense, to China’s destiny.

The Chinese government’s objective is to achieve about 7.5% annual growth, but we think it will end up recording 7.3% growth for 2014.

It was evident throughout the year that the economy’s momentum was easing and we think it will slow further in 2015 to about 7%.

What is the economic outlook for the US in 2015?

The US outlook is quite positive.

Business activity picked up in the US through most of 2014 after a rocky start due to exceptionally bad weather.

It seems the US Federal Reserve is closer to increasing interest rates, with a rise expected from around the middle of 2015.

The consequence of that is there have been increased capital flows back towards the US dollar and the US economy. Along with declining commodity prices, that has taken a little heat out of the Australian dollar over recent months.


What is the economic outlook for the European Union in 2015?

Europe continues to see very difficult business conditions and the monetary authorities there appear to be moving towards more full-blown quantitative easing through late 2014, or the first part of 2015, to shore up growth and confidence and avert the risk of deflation.

(Deflation is defined as a ‘general decline in prices’. Persistent decline in prices can create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. Source: http://www.investopedia.com/)

Quantitative easing involves using a raft of monetary policy measures, such as buying government and other private sector securities, in an effort to push down longer term interest rates, reducing the cost of borrowing and restarting activity in the capital markets.

The interest rate is the normal mechanism central banks use to change monetary policy but Europe, like America a few years ago, has essentially brought interest rates to zero.

Despite the low rates a lot of businesses and households in Europe don’t particularly want to borrow more money. The jury is still out on what impact the quantitative easing will have on lifting spending and physical investment.

What is the economic outlook for Japan in 2015?

Speaking of deflation, it’s exactly the policy that Japanese Prime Minister Shinzo Abe is seeking to avoid through a very aggressive monetary combination policy with the Bank of Japan. He is seeking a mandate to push forward his policies in 2015 and beyond.

Prime Minister Abe’s objective is to get rid of deflation and restart growth, and lift Japan’s economic performance. The jury is still out on whether he’ll be successful.


What is the economic outlook for India in 2015?

India has a new prime minister – Narendra Modi – who has a positive track record for economic reform as former Chief Minister of Gujurat state.

There is no doubt India’s economy has a lot of potential growth, with a highly educated middle class and strong level of entrepreneurship, but the difficulty of doing business in India has been the bureaucracy and poor quality of infrastructure supporting business.

Mr Modi is a strong individual with an absolute majority in parliament, so he has as good a prospect as any for changing that.

As a result India is coming closer into focus as offering some positive opportunities for Australia over the next couple of years, at least.

Officials from both countries are working toward an Australia-India Free Trade Agreement. Already India sources resources and energy commodities from Australia, such as coal, gold and copper as well as trade in manufactured goods. Education and tourism exports are also prominent, as well as engineering, mining services and health services.

We’re expecting India’s underlying business activity and economic growth will pick up in 2015-16, barring exceptional events which sometimes affect their growth rate, such as monsoon conditions affecting agriculture.

India’s growth rate is expected to come in at 5.3% for 2014 and we’re forecasting growth of 6.1 to 6.2% in 2015.

This increased growth will be driven by higher levels of infrastructure spending, manufacturing and business investment.


How do you expect the international economic outlook to impact Australian business?

The impacts will come through in several ways:

1. Lower export commodity prices or, as economists call it, lower terms of trade – Lower terms of trade occur when you have lower export prices relative to import prices. The impact of lower terms of trade directly affects the revenue streams of some companies, for example iron ore exporters who are seeing lower prices through the slowdown in China.

The iron ore price has halved in the past year – dropping from $140/tonne at the end of 2013 to just below $70/tonne at the end of 2014.


Part of that has been caused by the demand slowdown in China as the property market has slowed and part of it has been that Australia has been increasing its resource capacity in recent years, so there is a lot more supply leaving Australia and selling into China.

More supply and less demand usually produces a lower price outcome, so it shouldn’t be a surprise the iron ore price is going down right now.

The lower terms of trade are directly reducing income growth within the Australian economy and there are probably lagged effects of declining commodity prices which will feed through into export receipts in the months ahead.

This situation seems likely to continue in 2015, it’s just a matter of how far those prices will fall, and how much further the terms of trade will fall.

If you have lower income growth you have less company profit growth in those sectors, and probably less wages and income growth, which affects government tax revenues. We’ve already seen some evidence of this in the Federal Government’s upward revision of its Budget deficit.


2. Interest rate policies – Policies encouraging lower interest rates in many of these economies, particularly Japan and Europe and maybe in China, mean Australian interest rates continue to be relatively attractive to investors from those parts of the world.

This has the effect of shoring up some demand for the Australian dollar which will support the Australian dollar exchange rate against those particular economies.

That means exporters to Europe, Japan and so on are still facing quite difficult competitive conditions in those markets, both from an exchange rate point of view and also perhaps from slower growth in those markets as well.

We’ve seen the Aussie dollar lose quite a lot of ground against the US dollar because of the capital flowing back to that economy, but against the other currencies, less so.

To get our overall exchange rate lower, we’ll need an even weaker exchange rate against the US dollar.

What does the Free Trade Agreement between Australia and China mean for business in 2015?

It will mean more opportunities in particular sectors, particularly agricultural sectors, with deeper opportunities as tariffs come off.

Minister for Trade and Investment Andrew Robb pointed out recently that tariffs will be abolished for Australia’s $13 billion dairy industry, while beef and sheep farmers will also gain from the abolition of tariffs ranging from 12-25 per cent and all tariffs on Australian horticulture will be eliminated.

Tariffs on Australian wine of 14 to 30 per cent will go within four years, while restrictive tariffs on a wide range of seafood, including abalone, rock lobster, and southern bluefin tuna will also cease within four years. These are all positive market opening and access developments.


These agreements take time to filter through into positive outcomes, so it will be hard to track them, but we know there’s a lot of interest from some parts of China in investing in Australian agribusiness.

There’s also an expectation among Chinese business and consumers that they will have access to cheaper and higher quality products than has previously been the case, which will help to promote the success of Australian business selling into China.

One of the priorities of the Chinese government is to reduce pollution in China and Chinese consumers want “clean” products.

The Free Trade Agreement received a lot of coverage on social media sites in China, raising expectations from Chinese consumers about access to an increased range of these “clean” food products.

Australia has that reputation so now business needs to capitalise on it.


What are the major opportunities for Australia in 2015?

A continuing low oil price offers to raise the growth rate of oil-importing economies in Asia, where Australia’s exports are focused.

The oil price has come off from over $US110/barrel mid-year to less than $US60/barrel now (mid-December 2014).

That’s going to crimp the export revenue of oil-producing economies such as the Middle East, Russia and perhaps Canada, but for oil-consuming economies such as much of Asia, the US, China and Europe, the lower oil price is potentially quite a big positive for growth.

This is because when oil prices fall people pay less at the pump, transport companies pay less, there’s improved profitability throughout the supply chain, it supports our real income and our purchasing power – we have more money to spend on other things.

According to the IMF, each $US40 cut in the oil price could boost world GDP by a half a per cent over the next couple of years. This might be just the shot in the arm the global economy needs to support growth. Oil prices have already fallen more than this.

What are the major risks for Australia in 2015?

The key risk is that Australia is so closely tied to China.

China’s destiny is going to have a big impact on what happens in Australia, particularly for our export sector and our export prices.

One risk is that the Chinese economy slows down further than we expect.

The other big risk is our domestic economy doesn’t make a smooth transition away from resource export growth to more domestically oriented growth.


While the exchange rate has declined significantly against the US dollar, it remains high against the Japanese yen and European currencies.

Also, a big challenge for government over the year ahead is to engender a greater level of business and consumer confidence – the missing link that would see domestic economic growth pick up. The RBA has also recently said it would prefer to see the Aussie dollar at 0.75 US cents, rather than 0.85, as support for domestic business and industry.


Chapter 3: A year of cautious optimism for SMEs Comments by James Price JPAbusiness

Based on what we’ve heard from our two experts, 2015 looks like being a year of both caution and optimism for business owners in Australia.

The cautious outlook is led by:

• increased potential volatility in exchange rate movements and, therefore, financial markets;

• an uncertainty about the strength of a couple of our major trading partners, particularly China but also Japan, and the risk of ‘hiccups’ in those markets impacting Australian businesses that export products and services to those markets;

• a heavy downward trend in mining investment impacting businesses servicing that sector, and also the flow-on effect to businesses in those geographic regions most affected by mining employment; and,

• a non-mining sector with a patchy investment outlook.

There are also a number of reasons for optimism:

• We have seen a period of great consolidation in the US, from quite a difficult recession to now an uptick in growth prospects, jobs and manufacturing. This looks likely to fuel an improved US economy and therefore provide investment opportunities and opportunities for Australian businesses that sell products and services into that market. That’s a real positive and provides a counter-balance to the more uncertain environment in China and Japan.


• Australia is looking at continued low interest rates, low inflation and a relatively low wages growth environment. In comparison to this time last year, we also appear to be seeing a moderate loosening of credit availability for businesses, as banks become a little less constrictive and more willing to lend. What all this means is potentially improved margins, sustained if not improved profitability, and perhaps the opportunity to leverage investment into business growth.

• There are ‘green shoots’ to be seen around the China-Australia Free Trade Agreement (ChAFTA) which, although not implemented yet, gives cause for optimism in a number of sectors in the Australian business community in terms of future demand for products and services. There are also promising signs about potential opportunities in terms of trade and investment in markets such as India, although untapped at this stage.

• It’s a bit unclear, but consumer sentiment in the Australian economy is potentially better than last year. It’s interesting to note there has been a flight to savings over the past one to two years which is strengthening individuals’ balance sheets and that’s likely to mean a more favourable retail-spending environment.


Doing business in a new environment

Looking at all these elements of the Australian and international economy as we head into 2015, it appears to me as if – medium term – there are some really positive signs for Australian businesses.

However 2015 is also looking a bit like last year in some respects, i.e. 2015 is another rebalancing and reshaping year.

It will have all the factors mentioned above and which our experts have focused on, but it will also have some of the same issues businesses faced in 2014:

• continued pressures from hyper competition; • difficulty sourcing skilled and appropriate labour in some geographic

areas; and, • impact of changed business models regarding manufacturing,

sourcing goods and the effect of the digital economy on distribution models and the retail environment.

So those influences are all still present in the economy and they’re helping to rebalance and reshape the way our clients do business.


JPAbusiness case study – A cautionary tale

Before we talk about what business owners need to focus on in 2015, I’d like to share a little case study – a real-life circumstance I came across recently and which is a very unfortunate and cautionary tale:

A business owner in Sydney runs a small to medium-sized wholesale distribution business in the office supplies sector.

It has been operating for more than 15 years and, until recently, had the exclusive distribution rights for a particular range of products supplied by an international company.

This exclusive product range represented about 80% of the business’s sales.

The business had been distributing these products in the Australian market for upwards of 15 years and had experienced growth over all those years, including 2014. It was highly profitable, highly successful, very focused and professional.

Suddenly, and without notice, within the space of a few weeks the exclusive arrangement came to an end because the product provider was changing its business model and looking at other distribution opportunities – perhaps thinking the grass was greener on the other side of the fence.

As a result the wholesale distribution business is now at the point where it is almost no longer viable, notwithstanding it does have other products. It has just lost a major part of its product suite and this loss was completely unexpected because it thought it was doing a great job and had been doing a great job for an extended period of time.


What went wrong?

It sounds to me like this business did not have a solid supply agreement, with regular reviews and longevity factored in.

The business owners probably felt: “We have a long-term relationship with this supplier, we’ve worked with them, we’ve built their product in this market for more than 15 years, we’ve made a number of investments in our business to make sure we’re doing that well – we can count on this relationship continuing.”

Unfortunately, particularly in an environment showing volatility and a reshaping of business models, you cannot take the market and your business model for granted.

Well-documented supply agreements critical in a volatile market

We’ve talked in previous eBooks and blogs about the need for customer and supplier diversity.


We’ve also talked about seeking feedback from customers and suppliers, having supply agreements, ensuring you have well-documented and well-articulated understandings with key suppliers.

This is even more the case when you’re going through a period of uncertainty and volatility.

These agreements are important to ensure your business is not open to shocks, like the one experienced in the example I’ve just given, and they will also provide a solid foundation from which to grow your business.


Chapter 4: Growing your business in a volatile environment Comments by James Price JPAbusiness Pty Ltd

Our experts tell us there is investment caution among business.

We know there has been a marked reduction in business investment in the mining sector, and Australia certainly hasn’t had strong levels of non-mining business investment for some time.

However some non-mining sub-sectors are starting to invest and at JPAbusiness we’re seeing this first-hand. A number of our clients are conducting feasibility assessments and due diligence on growing their businesses, investing funds, buying other businesses, and looking at new products, services and business models to take to the market.

This is great news but we urge readers – just as we urge our clients – to proceed with caution.

Laying the foundation for future growth

If you’re thinking of investing in your business, either in your existing business model or in a new business model, be very careful to ensure your foundation business model is strong.

Don’t be like the case study in our last chapter.


In this difficult investment environment, your caution should be directed not just at the new things you’re going to invest in and the risks and return around those, but it should also be directed at ensuring your core business is solid.

For example, make sure you’re not exposed to a supplier with a large percentage of your sales tied up in their product – a supplier who may suddenly disappear because the grass looks greener on the other side of the fence!

If you have solid agreements underpinning your core business, it will make investment decisions a lot easier.

Time to take stock

If you’re relaxing during this holiday period then now is the perfect time for a little business-focused introspection.

Take five or 10 minutes (in a hammock, if possible) and consider: ‘Just how solid is my core business model?’

Use the JPAbusiness Business Health Check Template to help you and score your business on some key health factors, including:

• Staff performance and culture • Financial performance • Cash flow • Quality of job delivery • Business sustainability

(We’ve included the Template on the following pages, or you can download a fresh copy by clicking on the title above.)

Once you’ve answered the Business Health Check questions and tallied up your rating, think about your business in terms of the opportunities and challenges identified by our guest contributors.


Is your business solid, sound and investment ready as you head into 2015? Or is it looking a little exposed to potential shocks from a volatile Australian and world economy?

If it’s the latter, then take another look at the health factors listed in the Business Health Check template. Talk to your advisor and make the most of this time to plan how you’re going to create a solid platform from which to drive your business forward in 2015.

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JPAbusiness"Business"Health"Check"Template"

Rate%your%business%health%

When thinking about the state of your business today, please allocate a score of 1, 2 or 3 to the following Business Health Factors (1=below your expectations, 2=meets your expectations, 3=exceeds your expectations).

Please be honest with your rating – your business, its customers and staff, are counting on it!

Business""

Health"Factors""What"to"consider"

Rating"

(Circle"your"choice)"

Consistency of business

systems and processes

Consistent business systems and processes ensure

regularity of business performance, which is critical to

delivering customer service and efficient outcomes.

1 2 3

Staff performance People are key to driving business performance – are

you getting value from your investment in people? Are

your expectations and staff job responsibilities being

met?

1 2 3

Financial performance Are your expectations regarding the financial

performance of the business being met? Are you a

solvent business (i.e. consistently meeting current

financial commitments), and are you also meeting

financial projections and budgets?

1 2 3

Billing, invoicing and debtor

management

Are your customers meeting your payment terms? Are

billing processes and follow-up timely and in close

proximity to when services or products are provided or

sold?

1 2 3

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Cash flow Cash flow is the blood in the veins of your business, allowing you to operate day to day. Is the blood flow strong or weak? Does the business experience periods of tight or constrained cash flow that impact day-to-day operations?

1 2 3

Creditor payments Are you meeting your obligations and commitments to

suppliers? Are you meeting your statutory payments to parties such as the ATO?

1 2 3

Work in progress The strength and diversity of your WIP is a measure of the business maintainable earnings. Do you have a solid order book into the future?

1 2 3

Job management and project

delivery

In order to manage risk and meet customer expectations, you need to know exactly where projects are up to, in terms of scope, delivery and financial processes, such as invoicing.

1 2 3

Quality of job delivery Are you actively and dynamically measuring the quality outcomes of what you produce/sell/provide? Or do you only find out about quality when you get a complaint?

1 2 3

Client servicing Are your clients’ expectations being met? Measure this by seeking feedback from clients, and keep track of repeat business and customer retention.

1 2 3

Organisation and scheduling Do you feel in control of the day-to-day activities your business undertakes? Are tasks planned, scheduled, prioritised?

1 2 3

Risk management Do you have an active process within the business for identifying and addressing key risks – payment, market, customer, safety – that may dramatically impact the fortunes of your business?

1 2 3

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What%your%results%mean:%

30 plus If you scored 30 or more, chances are your business has a sound health for the years

ahead. You might want to consider strategic growth opportunities or other refinements

to assist with your longer term success.

20 – 30 If you scored between 20 and 30, chances are you’ll be experiencing some aches and

pains, either internally with regards to delivery and performance, from a cash flow or

financial perspective, or from other factors. Consider seeking the advice and assistance

of an advisor to explore and recommend some remedies.

Below 20 If you scored below 20, chances are it’s time for some significant ‘surgery’. A

performance review or other such options, including restructure, turnaround plan or

possible sale or divestment, may need to be considered.

Please"feel"free"to"post"this"template"on"your"blog,"or"email,"tweet"and"share"it"with"your"network.""

Staff culture Is your people culture conducive to a positive, open

and interactive team environment that is rewarding for

the business and the individuals that work within it?

1 2 3

Business sustainability and

reward for owners

Are you maintaining and growing the value of your

business? Are you getting a decent remuneration as

an owner working in the business for your day-to-day

work, and also a return on the funds you have

employed? How vulnerable is the business to outside

events?

1 2 3

Business plan and budget/

projections documented for

FY15

Successful businesses have a keen eye on the future.

They plan out where the business needs to be at least

in the next 12 months (and beyond) and they have a

budget and projection for how that will be achieved.

1 2 3

Total"Score…………………""""

Date post:	16-Jul-2015
Category:	Business
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