Bank Loan Reviews Highlight Declining SME Survival Rates
One of the latest "darlings" of the fintech space, Prospa, announced recently that approx 1 in 4 businesses that had borrowed funds "...between 2013 and 2018 were uncertain they would have remained afloat without the injection of cash from their loan."
It estimated that approx 44% of the funds borrowed were used for working capital or purchasing inventory.
This is in line with the ABS statistics in our latest State of SME Performance report where the ABS reported that:
Survival rates of SMEs with revenue less than $2m were 60% or less - so 1 in 3 will fail.
Approx 93% of SMEs have revenue less than $2m - only 1 in 15 grow past this point.
Average EBITDA margin across all businesses is 14.5% - there are a lot of businesses with low profit margins.
There is no doubt that at the time, most of these businesses needed the funds. And I find clients more and more have horror stories to tell about how banks have tightened up on credit availability, amid concerns that businesses will be unable to pay.
With so much focus on the banks at the moment it is easy to blame the banks for the woes of SMEs as lending conditions tighten.
But this post is not about to lambast the banks - what concerns me more is the trend in survival rates of Australian SMEs and that the nation has a growing number of small and unprofitable businesses.
What strikes me the most about this is the anecdotal evidence that one of the biggest reasons for this trend is a lack of knowledge and understanding of business by SME owners.
We have a nation of budding business owners, from tradies to shop owners and service providers. But the majority of these businesses do NOT:
Produce regular reports on how well the business is doing
Have systems in place to reduce the reliance on key staff
Understand the basics of a Profit and Loss and Balance Sheet.
In talking with clients I often ask them three key questions:
What is your annualised turnover right now?
How much depreciation was reported last financial year?
Are owners wages taken as drawings or reported as wages or salaries?
At least 60% will reply with some form of "I dunno"!
They are focused on:
Last week's sales.
Cash in the bank.
And these things should absolutely be focused on - but no be the whole focus every day. Letting these things slip can mean death for a business.
This is where a greater focus on systems and procedures are required. Have systems set up so that you can focus on building sales, understanding the costs in your business and what must be done to increase profitability.
I understand they sound like motherhood statements, but that is the skill of a good business owner - to take these statements and develop procedures and systems so they can focus on proactive business improvement actions rather than rely on their own time to manage details that could be handled in other ways.
One final comment - too many business owners fail to train themselves up to really understand what financial reports mean and how to interpret them. We don't need business owners to be high-powered corporate advisers, but we do need a greater skills level in financial, business and strategy management.
Otherwise our economy and SME sector will have much more to worry about than banks gouging customers.