Is your business feeling the credit crunch?

As a CPA Practice that provides onsite bookkeeping services in Sydney, Brisbane and Melbourne, we are very fortunate to be allowed an insight into financial performance of a wide range of businesses in different industries throughout Australia.

The Australian economy has achieved incredible growth over the past 10 years. This success has lead to higher wages which, together with increased immigration and and cheaper interest rates has fueled incredible growth to real estate prices throughout Australia.

As any business owner that has attempted to raise finance for their business would know, the first question the bank manager asks is “What property can you provide as security.” Even if you own a business that may be worth more than $1M, the bank manager still likes to have “bricks & mortar” as security. Many of our clients (and myself included) would not have been able to take the risk of starting their own business without having excess equity in their home which they could borrow against.

This is all fine while the economy is booming and property prices are compounding year after year. But what happens now are successive interest rate rises and the sub-prime crises in the US has meant that lenders are being much more selective in who they lend to and the level of interest rates has meant that there just aren’t the number of buyers out there that there was over the last couple of years.

Whether this translates to 10% and 20% falls in property prices as we have seen in the UK and the US over the past 12 months, we will have to wait and see. There is a case that our high level of immigration and lack of new land releases will ensure that our property market will not crash like it has overseas. One thing for certain is that business sentiment and the ability to access credit for small business has taken a hammering and I think it is important for all of our clients to consider how it may effect their business over the next 12-24 months.

We have already noticed some clients taking a bit longer to pay their bills. There is nothing more frustrating than being used as a “bank” and we have required all new clients to agree to monthly direct debits which has been fantastic for our cashflow. You can read further about this at the Books Onsite website.

We have also noticed an increased level of uncertainty. This was particularly obvious immediately after the major stock market corrections earlier in the year. The feedback I get from a lot of clients is that they are holding off on any major investment or recruitment decisions until they have more confidence in which way the economy is going to go.

This general lack of confidence has a flow on effect and some more conservative clients are “battening down the hatches” waiting to see what happens with the US and Chinese economy. This period of slower economic growth may result in tougher employment opportunities. It may also present opportunities as asset values fall for those with access to capital. The key to this period is to keep your leverage levels down and that cash is king.

August 31, 2008 | Filed Under Bookkeeping Tips | Leave a Comment