Small business confidence has shifted from negative into positive territory according to the latest Westpac Melbourne Institute SME Index.
The index lifted from 95.6 in Q3 2016 to 100.7 in Q4 2016 – the first time it has surpassed the 100 neutral mark this year.
According to Westpac senior economist Matthew Hassan, the positive shift in sentiment over the last quarter was driven by improvements in current business activity, with both activity and sales up on a year ago.
“However, most SMEs are still reporting lower profitability, even those with an active business strategy for the period ahead,” Hassan says. “This suggests the main problem now is how to generate more profit from the pick-up. Retailers relying on aggressive discounting for example may be no better off if the cost of the discounts is bigger than the revenue gain from boost to sales.”
New South Wales has the most confident SMEs in the country (up 11.2% to an index of 110.4), while confidence in Queensland jumped by 14.4% to 100.2. South Australia recorded the largest quarterly increase in SME confidence (37.1%), albeit remains in negative territory at 87.6.
In Victoria, SME confidence dropped to 83.7, which the survey attributes to changes in overheads and costs (69.5 in December versus 57.4 in September) and perceptions of changes in government regulation (42.1 in December verses 29.3 in September).
The Index reveals the top industries with the highest SME confidence were the Construction, and Financial and Real Estate Services sectors (116 and 113.2 respectively) with each sector posting improvements in business conditions in the last three months.
Look ahead, Westpac’s general manager of SME Business Bank, Julie Rynski, highlights the top challenges SMEs face over the holiday period are business activity slowing down, cash flow and the closure of suppliers.
“Interestingly, our SME Index found one in three SMEs with an end-of-year strategy are feeling more optimistic than those without. From those surveyed this quarter, more than half have no strategy in place for the holiday season, so now is a critical time for businesses to plan ahead and remain in control, to continue the upward trend in 2017,” Rynski advises.
The survey also uncovered the top three business goals for SMEs in 2017: enhancing products and services, hiring new staff and improving accounting systems.
“It’s clear that businesses are reviewing the past 12 months and making meaningful changes for the year ahead,” says Rynksi.
“The strong increase in business sentiment is a burst of good news as 2016 draws to a close and we move into a new year.”