2020 might be the worst year for business

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// New research reveals that despite strong Government support and a re-opening up of the economy, most businesses cut their workforce and lost profits…

A survey commissioned by money.com.au interviewed 258 business owners with employees whose businesses are still in operation.

One might want to preface their results with a word of warning about ‘survivor bias’, but anyway…

A wide range of cuts

The results revealed that 2020 will likely be the worst year for businesses on record. While the majority of businesses suffered a decline in profits, 35% made the same profit as last year, and just 15% made more profit.

This is despite the wide-scale cuts that directors made to their businesses.

Among the 55% of business owners who made cuts to crucial expenses, 44% let go of employees and contractors, despite JobKeeper being made available to hold onto staff on payroll.

A quarter (24%) made cuts to their own salaries, and 24% froze salaries and did not pay bonuses across their businesses.

Nearly half (45%) made cuts to travel. Government restrictions and travel bans have made it virtually impossible to travel internationally anyway. The low level of travel spending is set to continue, as two-thirds of global firms in the Asia Pacific plan to limit corporate travel permanently, even after the pandemic.

One third (34%) of businesses made cuts to lunches and entertainment, and one fifth (20%) cut back on marketing expenses.

However, most businesses held onto their leased premises – even though the pandemic forced staff to work from home, and rent being a significant ongoing business expenses, generally accounting for up to 20% of operating costs.

Retailers pay an average of $12,000 in monthly rent and gym owners can be set back nearly $10,000 a month for rent.

The survey found that just 17% of business owners cut rent expenses this year, by either moving out of the workplace or negotiating on the lease price.

A difference in states

Money.com.au also discovered a marked difference in the proportion of businesses that cut costs across the States. Two thirds (65%) of NSW businesses made cuts, compared with 59% of Victorian businesses – despite Victoria subjected to a longer and harsher lockdown – and 44% of Queensland businesses.

The NSW economy is expected to shrink by around 10% and the State budget in Victoria is forecast to be $7.5 billion in deficit. This suggests the two States have been financially impacted the most as a result of the shutdowns and restrictions this year.

Businesses in WA, where the budget is forecast to be $1.7 billion in surplus, only 33% of business have cut costs. Indeed, a recent mid year financial review from the WA government has predicted a growth of 2% for the gross state product.

Businesses still in survival mode

The data also revealed that, despite the fall in profits and cost cutting, 57% of businesses did not work towards increasing their business income this year.

The lack of action may be due to fears of fresh lockdowns, a motivation to remain eligible for JobKeeper (32% of surveyed businesses were on the JobKeeper program), or a difficulty in finding new hires.

“It is concerning that half of the businesses still in operation seem to be in survival mode – even while they made major cuts to their operational expenses,” said licensed financial advisor and Money.com.au spokesperson, Helen Baker.

“It is also concerning that this year has been so unpredictable that more than half of businesses did not … regain or grow their income. Very little has been known about this virus, and it was impossible to forecast whether Australia would go into a second wave and experience another lockdown or tightening of restrictions.

“A proportion of businesses might have also felt adequately supported by the Government’s cash flow boost, JobKeeper, instant asset write off and the SME Guarantee Scheme and made the decision to keep their business growth stagnant until the end of the pandemic.”

Helen says that challenges in employing new people might have been another reason for the lack of proactive growth.

“Business owners may have found it difficult to find new people, based on community fears of contracting COVID-19 in the workplace. Remote working arrangements have also brought new challenges, particularly when it comes to hiring staff.

“The culture around working from home is not always conducive to business growth and can prove difficult to onboard and train new employees remotely.”

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Photos by Harry Cunningham @harry.digital from Pexels