Big opportunities for SMEs who adapt in the face of cost pressures

Investing in better technology, human capital and managing costs will give businesses a head start in 2013, according to a study by MYOB and the New Zealand Institute of Economic Research (NZIER). 

The analysis also revealed pressures that hold many businesses back from achieving their potential.

The NZIER analysed three years’ worth of data from the MYOB Business Monitor – a regular survey of over 1000 small and medium enterprises. It found fuel prices, competitive activity and business prices and margins were the most severe pressures on business over the last three years. 

These elements posed a consistent challenge throughout the recession and the slow recovery, with some businesses better equipped to overcome them than others.

“Most businesses have shared common pressures over the last three years,” says NZIER Principal Economist Shamubeel Eaqub. “Business operators who are able to find ways to turn those challenges into opportunities will have a real advantage over the year ahead.”

NZIER’s report found a combination of leveraging new technologies, new organisational structures and better systems could help businesses improve their operational and financial performance. 

“The NZIER’s analysis of our research demonstrates there’s a real opportunity for business owners to increase their profitability if they have the courage to do things differently,” says MYOB CEO Tim Reed. 

“For example, NZIER’s report shows that business operators are more likely to have financial success if they undertake activities including using improved communications technology, building a website presence, resisting staff cost cuts and moving aspects of their operation into the cloud. Updating their accounting system and managing inventory more efficiently will also assist in increasing chances of success. 

“Similarly, those who make better use of online marketing find themselves more able to compete. It allows them to communicate with customers in a far more targeted way, which takes pressure off their margins.”

According to the data, fuel prices placed the most pressure on business over the last three years. Mr Eaqub says this is relatively unusual as demand for fuel tends to drop in an economic downturn.

“The heightened impact of fuel prices during this economic downturn has been relatively unique. Normally we would expect to see demand falling as economic activity slowed. This downturn, however, has been different as rising demand from the developing world, alongside tensions in the Middle East, has kept prices high. This means New Zealand’s businesses have had the worst of both worlds – rising fuel prices and a stagnant economy.” 

The next greatest pressures were the difficulty in attracting new customers, increased competitive activity and prices and margins.

 These three pressures are often interconnected in a downturn and can be demand significant attention by business operators who negotiate them alone.

“There is greater competition for available customers in a downturn. This means that many businesses are less able to pass on costs for fear of losing market share, which has a real impact on profitability,” he says.

“Those looking to improve their profits without having to pass costs to consumers should ensure they have a solid understanding of where their costs come from and how they can provide greater value to their customers to justify any price rises. Customers will often pay more for a product or service if the benefits of doing so are clear.”

NZIER’s analysis also suggested this will be a big year for business advisors like accountants.  They will play an important role in helping business operators adjust their systems, processes and strategies to mitigate the pressures on their bottom lines. 

“The most productive changes businesses can make, especially organisational changes or improving use of technology, can be quite technical and specialised, but the significant rewards can be worth it,” says Mr Reed. “This year, advisors like accountants and business mentors will have a vital role to play in helping businesses to take advantage of these opportunities.”