Tax and people on private business agenda

27 April 2010

Simplification and fewer taxes are what private businesses want to see as the result of the soon to be released Henry Tax Review.

According to PricewaterhouseCoopers Private Business Barometer released today private businesses have a strong desire for tax reform. Of the 750 private businesses asked what changes to taxation policy would benefit them, the overwhelming response (78%) was a reduction in the number of business taxes.

Other changes private businesses hope the Henry Tax Review will affect include an improved write-off for capital expenditure (61%), harmonisation of state taxes (57%) and simplification of income tax rules for small businesses (54%).

PricewaterhouseCoopers partner Gregory Will says, "Complying with up to eight different state and territory regimes is time consuming and resource intensive for private businesses."

"Simplification of the tax system would give back valuable time and resources to focus on activities that will directly impact the business bottom line."

Released twice a year, the PwC Private Business Barometer is compiled in conjunction with Jones Donald Strategy Partners. For the Barometer, 750 private businesses with an annual turnover of $10 to $100 million were interviewed.

Their responses provide insights about growth, funding, operations and people; critical issues such as tax reform and the government stimulus; and reflections on the GFC.

Surviving the GFC & the Government's stimulus package

Private businesses are optimistic about the short and long term future.

On reflection of the past 12 months, around a third of businesses (36%) said surviving the GFC had been their proudest achievement. For another 39 per cent, their greatest achievement was not just survival but growth during the tougher economic times.

Asked to name the most significant impact of the GFC, about half of the businesses surveyed (51%) said it was a closer focus on cost.

Managing partner Jones Donald Strategy Partners, Tony Jones says, "Despite the rebound of the Australian economy private business managers continued to take a conservative approach. Many kept a tight hold on cost and set cautious goals. The result in many cases was better than expected profit results and an optimistic outlook."

Did the Government's stimulus package play a role? According to PwC Partner Gregory Will, in the retail sector more than two thirds (69%) of businesses believed the Government's stimulus package had a positive impact on sales. As proof, close to half said Christmas sales were up on 2008.

Growth: Businesses optimistic

Private businesses put in a strong performance over the last 12 months. Six out of 10 said they had met or exceeded set revenue targets.

Across the states, sales and profits have been a mixed bag according to Mr Will. Profits in New South Wales (NSW) and Victoria jumped from single digits in October 2009 to a healthier 22 per cent and 16 per cent, respectively.

"The boom states, Western Australia and Queensland, are still seeing double digit growth but it has eased off since late last year," Mr Will says.

Looking ahead, private businesses are optimistic about short and medium term sales and profit growth forecasts. The short term sales forecast is 13 per cent and profits is 17 per cent.

"The longer three year growth forecasts are the strongest we have seen since the first Barometer in May 2007 with sales of 18 per cent and profits of 25 per cent".

Mr Will says, "Business owners are confident about growing their businesses and are in it for the long haul with nine out of 10 having no plans to exit in the next 2 years."

Organic growth is the number one means of achieving short and medium term growth targets for more than half of the businesses surveyed. However, some businesses are starting to look at alternatives including expanding into new products, expanding into new geographic markets and acquisitions.

People: Number one challenge

As confidence returns to the market, funding has been bumped by people as the number one challenge facing private businesses. Half of the private businesses surveyed said attracting the 'right' people is the greatest test they now face.

Mr Will says, "Private businesses are optimistic about the future but face a brand new set of challenges dominated by people: attracting, retaining and skilling. Having the 'right' people will be critical to achieving growth."

With more than half of the businesses surveyed planning to hire full time equivalents in the next six months they will find themselves in a war for talent competing against each other and big business.

Remuneration will play a key role particularly with nearly nine out of 10 businesses anticipating wage increases of up to 7 per cent in the next 12 months.

Mr Will says, "Competing on wages alone is not enough for private companies as they will not be able to absorb pay increases like big business."

"Business owners and operators must become more creative when attracting talent and promoting the benefits of working for a private business."

Some of the benefits include:

• Greater understanding of the overall business - how it operates and where its headed
• Inclusive culture where everyone is a contributor to achieving broader business goals
• Flexible working arrangements
• More dynamic, agile working environment and;
• Some would argue a greater sense of community

Funding: Less critical

Funding has taken a backseat to people with close to two thirds of businesses (61%) having no major plans to invest. Five out of 10 businesses said they have had no recent difficulties in raising capital, a drastic change from six months ago.

However, businesses considering investments say they will seek funds from investment banks. In the previous Barometer in October 2009, generating capital internally was the most popular source of funding.

Mr Will says, "The average debt ratio is 26 per cent, the lowest level in three years. Businesses are paying back their loans and being conservative in the way they structure their finance."

"Business owners and operators will also need to work on existing relationships with financiers."

Business operations: GFC prompts better planning

The Barometer shows that businesses have learnt some valuable lessons from the GFC. At the top of the list is the importance of a business plan that is reviewed regularly.

Nearly every business (94%) surveyed had a business plan. This compares favourably with the results of the first Barometer in 2007, where 60 per cent of businesses said they had no formal plan.

Mr Will says, "The rise in the number of plans has been driven by the need to keep a close watch on organisational goals and finances not just a way to get funding."

"As the economy continues to improve, it will be imperative that businesses don't fall into old habits and lose the discipline of planning and regular reviews."

As it was during the GFC, price continues to be the main driver of competition. However, as the economy recovers customer expectation and demand is returning. Businesses will need to ask: "How can we increase revenue by raising prices for services and products without alienating our customers?"

Mr Wills says, "If one business in an industry or location raises prices they run the risk of losing market share and customers."

"The answer is to monitor and evaluate the competitive landscape. Businesses need to forge close relationships with customers and tailor pricing according to market trends and to individual customer circumstances."

Social media: new channel

Social networking has increasingly becoming a channel for private businesses to communicate with customers, to network and advertise products and services. The most popular social networking channels are Facebook (29%) and LinkedIn (17%).

Mr Will says "In the future social networking could be as much standard business practice as having a website is today".

"It's a relatively low cost marketing channel and easy to use but you need to understand how it works, etiquette and any risks before rushing in to using it."

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