Welcome to the Christmas edition of The Blueprint.
Wow! What a rollercoaster ride we have experienced over the past few months.
Starting with the collapse in the value of the Australian dollar against the US dollar from the highs of around 98 cents to the current levels trading around 65 cents in a few short months.
The Stockmarket recorded its worst fall in October in over 20 years with a fall of 14%.
But in such a volatile market there is also opportunity.
Interest rates continue to fall, with another rate cut announced earlier this week bringing the rate to 4.25%.
The Stockmarket in the last week of November recorded its biggest gain since 1980.
The continued low Australian dollar has exporters smarting, however a slowing global economy has them nervous about forward orders.
It is in these uncertain times that business management becomes even more critical. Opportunity still exists, but only to the discerning business that can closely manage and respond to changes in the market place.
In this edition we address a few of the challenges facing business and offer some words of advice.
Have a wonderful Christmas and let’s hope that the New Year brings greater stability and certainty to your business.
Regards
David Carpenter
The Global Economic Downturn and How Your Business Can Survive
Partner
Government Infrastructure Spending
Interest Rates
| The Global Economic Downturn and How Your Business Can Survive |
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With the global economy heading downward and Governments injecting billions into local economies, let's look at the current state of play and what you can do in times of an economic downturn to allow your business to grow.
World financial markets have come under severe stress since early September when turmoil was sparked by the failure or near failure of a number of financial institutions in the US and Europe. This led to a serious tightening in global credit availability.
The period since then has been marked by further large declines in equity prices and extreme volatility across a range of markets. In response to these developments, a number of Governments have announced measures to strengthen their financial systems, which should help to stabilise conditions over time.
The policy responses, including that of Australia, to these developments took several forms including increased provision of liquidity to the financial system and widespread reductions in official interest rates. In addition, the Australian Government announced a substantial fiscal stimulus in mid October 08, equivalent to approximately 1 per cent of GDP, with bulk of the effect to be delivered in the December 08 quarter.
Recent international data from the US, Europe, UK and Japan have generally indicated that there has been further deterioration in economic conditions in recent months. In addition there have been increasing signs of a slowing in China and other parts of the developing world. The slow down in China has prompted the Chinese Government to loosen monetary policy and to stimulate the economy through a 4 trillion yuan (approx A$800 billion) fiscal stimulus package.
These developments, coupled with the expected impacts of the recent financial turmoil, have prompted significant downward revisions to expectations of world economic growth by official and private-sector observers. As a result, global inflation is expected to decline more quickly than in earlier forecasts.
The Australian dollar has been highly volatile and has depreciated against the US dollar. In addition, the deteriorating outlook for world growth has contributed to broad-based falls in world commodity prices over recent months.
If your business is struggling from the lack of liquidity in capital markets or is susceptible to an economic down turn, then there are things you can do to ensure your balance sheet remains strong, and your business continues to grow.
By following the 7 tips you'll find that not only is your business ready to survive the credit crunch and economic down turn, but it's also far more stable and viable during bullish markets too.
Tip 1
Fighting bad & doubtful debts is a problem that businesses face at any stage in the economic cycle. However, when liquidity's drying up in the market, you might find the pinch is a bit harder to take. Consider credit insurance, provide discounts for those that pay on time, and don't be afraid to turn away business if the risk is too great. Before you turn away business, though, consider offering the customer a small discount and asking them to pay up-front. Phasing the sale or only allowing the customer to buy a smaller amount could work well too.
Tip 2
Raising capital might not be the smartest thing to do when a lack of liquidity is squeezing the supply-side of the money markets. However, if you have a healthy balance sheet you may find you can get a loan at the same price as you would expect. If you're a company that's relatively immune from economic sentiment, you will probably be able to raise a round of finance on good terms. And, if you can, you'll have money to spend while your competitors just try to survive.
Tip 3
Competing on price is a risky strategy when inflationary pressures are hitting your margins, and consumers are tightening their purse strings. However, when consumers are more price sensitive than ever, and your competitors are feeling weak, then there's never a better time to pounce - if you think you can survive.
Tip 4
Diversifying income sources is what fund managers have been doing for years. Too much exposure to one asset class, economy, sector, or currency can spell problems for fund managers, and it can cause problems for your business too. The depreciation in the Australian dollar creates significant opportunity for businesses to look to overseas markets to sell their products or services.
Tip 5
Public sector spending will often increase during economic uncertainty as the treasury attempts to inject liquidity into the marketplace. You can pick up this liquidity at the source, from the most credit worthy customer there is, if you are able to win public sector contracts.
Tip 6
Buy now and take advantage of lower interest rates, and less economic activity. You may find suppliers will offer you a discount when their sales aren't looking to great.
Tip 7
Hiring smart people is much easier when they are losing their jobs. Make sure your business considers hiring, especially for positions that will deliver immediate results, when the markets aren't functioning the way they are supposed to.
| Government Infrastructure Spending |
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The recently announced measures will pump $300 million into local Government infrastructure projects, and in the process it is hoped that business and consumer confidence is revitalised to insulate the Australian economy from the full effects of the credit crisis and the slowing global economy.
The $300 million will be available immediately and is required to be spent by September 2009. The latest spending follows the Government’s previously announced $10.4 billion stimulus package.
On a State Government level the recently delivered Mini-Budget has resulted in significant changes to the Government’s capital program over the forward estimates period and over the next decade. The 2008-09 Budget delivered in June 2008 included record levels of infrastructure spending in 2008-09. However, the Mini-Budget has reduced capital expenditure by around $890 million over the four years to 2011-12.
Whilst, there has been some re-assessment, the NSW Government is planning on investing $13.8 billion in job creating infrastructure in 2008. Next year they will invest $14.7 billion, $14.4 billion in 2010, and in 2011 they will invest a further $13.7 billion. This is the largest infrastructure program of any Government in Australia over the next 4 years and is in addition to the increasing the First Home Owners Grant to $24,000 in some cases.
It will remain to be seen what impact the increased infrastructure spending will have on the economy as a whole. It could be argued that the $300 million local Government package is no where near enough to make any real difference once it is divided amongst councils.
In any case, with increased spending on infrastructure on all Government levels, Governments are a large potential market for businesses of all sizes. Business owners should recognise this potential market and become familiar with ways to access it and act on any opportunities that may arise.
A common misconception is that there is a single procurement market for each Government level, with a centralised list of suppliers and standard purchasing arrangements. In fact, this is generally not the case as individual departments and agencies are largely responsible for their own business decisions and processes.
Within these agencies, there are often many different areas responsible for buying private sector goods and services. This means that there is no one ‘Government market' but many agencies effectively operating as separate markets and literally thousands of people across Australia making purchasing decisions on behalf of each level of Government.
It is worth investing the time to get to know the particular business requirements of different agencies so you can better target the most relevant markets for your business.
When tendering for Government projects you are normally required to supply financial information. This is typically the case for large manufacturing and industrial contracts. The financial statements are analysed by an independent body that consider and calculate key ratios. Be aware that that the independent body take your financial statements at face value, not considering if assets or liabilities are correctly classified or if further background information should be provided. This can be the difference in being added to the tender list or not. We are experienced in undertaking pre-tender reviews of your financial statements to assist with Government tenders. Please contact David Carpenter should you require assistance with this. If you require any further information on any of the topics we have touched on, please contact Cutcher & Neale to discuss your specific needs and how we can work with you to meet these challenges and move forward with accuracy and confidence.
Meet David Carpenter
Disclaimer: The material contained in this e-newsletter reflects general advice only, and has not been prepared to provide specific personal advice to any particular individual(s). It does not take into account the individual circumstances, risk profile, needs and objectives of specific individuals. The examples are used for the purposes of illustration only. The publishers and authors expressly disclaim all and any liability to any person, whether a client of Cutcher & Neale or not, who acts or fails to act as a consequence of reliance upon the whole or any part of this e-newsletter. 
With the Federal Government increasing its infrastructure investment spending in an effort to head off the economic downturn, there is a great opportunity for a wide range of businesses to benefit from local Government contracts.
Interest Rates
The blunted impact of monetary policy means that most analysts are now predicting the Reserve Bank of Australia will push rates much lower - with many now expecting official cash rate to reach a 2.75% to 3.25% low point from current 4.25%.
The primary factor is that despite 1.25% in rate cuts by the RBA in September/October which reduced official cash rate to 5.25%, and associated 1.22% reduction in prime variable mortgage rates, household borrowing rate have fallen by only 0.73% and the average rate on all outstanding business loans has fallen by around 0.70%. For the household sector (where mortgages represent around 85% of total debt) that was due to a rising proportion of fixed rate mortgages; smaller cuts in "non prime" mortgages (around 0.090%); negligible cuts in personal loan rates and some actual increases in credit card rates.
Whereas in the September/October period banks were able to pass on virtually all the rate cuts to the variable prime mortgage rates, the pass through for the November rate cut of 0.75% ranged from 0.58% to 0.65%, and of the latest 1% rate reduction announced in December, only two major banks passed this on in full. The credit crisis has had a direct impact here. Banks have been less successful than normal in cutting retail deposit rates to match the RBA's cuts as some of the smaller banks hold up deposit rates despite the recent Government guarantees.
The net result of these developments is that monetary policy is less effective than in past cycles, as it is aimed at private borrowing rates which directly affect confidence, incomes and spending. Clearly the RBA has the intention to quickly move rates lower so that monetary policy is helping rather then hindering the economy.
So what does this mean? Given the strong likelihood of continued rate cuts from the RBA in the new year, now is the time to ensure your current lending facilities are meeting your expectations. For those who have previously locked in a much higher fixed rate, consideration should be given to refinancing these loans as the interest savings may in fact be greater than the break out costs.
For example, if you have a loan of $300,000 fixed at 7.9% and refinance to a variable of 6.2%, your interest savings will be approximate $5,000 per annum. Hopefully these savings cancel out any exit/break fees involved. Now may be the perfect time to review your current facilities to ensure that you are receiving the maximum benefit from ongoing rate reductions. To find out more make an appointment with one of our specialist staff who will review your individual situation.
David Carpenter is a Partner with Cutcher & Neale and is part of our Business Services division. David's qualifications include Bachelor of Commerce from The University of Newcastle, a Fellow of the Institute of Chartered Accountants in Australia (ICAA), a Fellow of the Taxation Institute of Australia and Member of the Australian Institute of Management. He also has extensive experience assisting SME’s in the industrial sector in dealing with their accounting, taxation and business advisory needs.
David is a keen sportsman enjoying all forms of sport. He is a keen golfer. David is married with two children.
David’s expertise is in the following areas:
If the advice related to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement before making any decision. Readers should not act upon any matter or information contained in or implied by this e-newsletter without seeking appropriate professional financial advice.