Surprise findings from our new APAC small business survey

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast, brought to you by CPA Australia.

Dr Jane Rennie:
Hello and welcome to With Interest. I'm Dr. Jane Rennie, General Manager Media and Content at CPA Australia. This week, CPA Australia released our new Asia-Pacific Small Business Survey. After several years of heartbreak, you may be surprised to hear that small business growth was at a five-year-high in 2022. Perhaps a good year is on the cards for small business this year.

One potential storm cloud though is the absence of younger generations from the ranks of small business owners. Aussie business owners are decidedly older than their Asia-Pacific counterparts. Could this herald a problem down the track? CPA Australia certainly thinks so and has called on the government to launch a public inquiry into how to attract NextGen business owners. Joining me to discuss this and other survey results is one of the reports authors, Senior Business Manager at CPA Australia. Gavan Ord.

Gavan Ord:
Hello Jane and hello all our listeners.

Dr Jane Rennie:
By way of background, this survey was conducted in November and December 2022. We received responses from 4,280 small businesses in 11 markets. Gavan, over the last couple of years when we've discussed these results, it's felt like a pile on for Aussie businesses. Results have been overwhelmingly grim, grimmer indeed, than for the rest of the Asia-Pacific region. But this year there was actually a silver lining in the results. Australian small businesses had a better year in 2022. What can you tell us about this?

Gavan Ord:
Yeah, so if you look at the Australian results by themselves, 2022 was a better year, but there was higher growth in Australian small businesses, higher employment growth, and just a general pickup in across most sectors in 2022.

Dr Jane Rennie:
And when you say growth, are you referring to profit there or employees or the size of the business, for example?

Gavan Ord:
Yeah, so we don't define what growth is. We find that some people struggle with concepts of profit, particularly in the small business space. So, we just use the term growth and we do test that against other information we have, and we do find that growth is a good proxy for profit.

Dr Jane Rennie:
And what do you put this growth down to?

Gavan Ord:
Well, I think if you look back at the start of 2022, we're starting at the end of lockdowns, we're starting COVID related restrictions starting to be relieved, but we are still experiencing supply chain disruptions, employee absentees was extremely high. So, at the start of 2022, that was what we looked like. Fast-forward 12 months to the end of 2022, and it was a far better business environment. Supply chain disruptions were greatly minimised, employee absenteeism had been reduced, and sales were up. So, it was just a better 2022 compared to lockdown years of 2020 and 2021.

Dr Jane Rennie:
That's certainly a change from previous years. Were there other areas that Australian small businesses did well in or improved at?

Gavan Ord:
Yeah, so when we look at the data, some areas where the Australian businesses have picked up has been around e-commerce, social media, new payment technologies, investing in technology and exporting. So, there was definitely improvements in those areas, and we do find those areas are actually closely linked to growth. So, if you improve e-commerce sales, invariably you'll get a higher growth. So, there was a lot of good signs in the Australian results.

Dr Jane Rennie:
Gavan, it certainly sounds like reason to celebrate, but before I crack open the champagne, I wonder how does it actually compare to other Asia-Pacific countries that you surveyed? Was it indeed a strong year across the board?

Gavan Ord:
So, if we just look across the region, yes, it was a gently better year across the region with some exceptions. That was mainly due to the end of COVID restrictions in most markets. But other countries perform proportionally better than Australia. And the market in particular performed much better was Hong Kong, but they've had three or four years of tough economic times. So, while Australian results look good overall, proportionately it didn't do as well as other markets across the region.

Dr Jane Rennie:
Okay. So, what are some of the other areas that other markets did especially well in?

Gavan Ord:
Yeah, so I would start by saying one of the reasons for this survey is there's a lot of country specific surveys on small businesses. We're doing this survey, so you can actually compare how Australia's doing to other markets. And if you were just to look at the Australian results in isolation, as you said, we'll be popping the champagne or sparkling wine to be more technically correct, and giving each other high fires.

I know Jane and I, we give high fires as much as we can, but when you look at the results in comparison to other markets, Australia, you're still at the bottom end of this lead table, this ladder, we're still at the bottom end. And the areas where we're at the bottom end of this league table, especially around technology, so online sales, social media, investing in technology. We're also at the bottom end on innovation, on exporting, and on business management, so things like strategy, customer satisfaction. So, why did I pick all those? Because all those are the characteristics of high growth in small businesses, and all those areas are where Australian businesses are underperforming.

Dr Jane Rennie:
I'm really interested to hear you identify those factors. And the reason being is I felt there was a kind of techy theme to a number of them. I can't help but wonder if that's connected to another finding from the survey, and that is that Australia is the market with the highest percentage of respondents aged 50 and over. And then in terms of under forties, Australia was ranked ninth out of the 11 market surveyed. So, I guess you could say young business owners are missing in action. I have a simple question for you, Gavan. Why do you suppose that is? What is it that's turning off younger people from owning or operating their own businesses?

Gavan Ord:
That's a great question. We don't have a specific answer yet, but what I think the factors are is the uncertainty of running a small business in Australia, that risk versus reward equation. So, the risk you take on versus the reward just doesn't seem to be as good as it should be. Other things that come up as access to startup cash. So, that's obviously an issue particularly for younger people who don't own houses and therefore, find it much more difficult to find capital. Work life balance, small business owners are the bottle washer, the chef, the person out the front taking the orders, and the bookkeeper all in one. So, there's a lot of work involved. And also if you're an employee, why would you give up that job security and a pretty good salary to take on all those problems. So, I think to us they're sort of the main issues to consider.

Dr Jane Rennie:
Those considerations all make sense to me, but I wonder what our listeners think. Now we're actually running a poll on LinkedIn right now on this question. For listeners who are quick off the mark, you can vote on this poll on LinkedIn. Other countries in particular developing economies don't seem to have this same problem attracting younger generation. So, what is it Gavan that you think they're doing differently that attracts next gen business owners?

Gavan Ord:
Well, I think there's a number of factors. I think there's a strong cultural acceptance of being that business person and being a business person is seen as a really good career option. And that's partially because a business person is seen as potentially financially successful. So, I spoke before about that risk versus reward equation. I think in those developing markets the reward for effort is higher, proportionately higher than Australia. So yeah, I think there's, there's a few things, there's cultural acceptance are risk and failure and that reward for that effort is higher, and it's seen as a really good career option and I'm just not seeing that so in Australia- Jackie Blondell: If you're enjoying this podcast, you should check out our in-depth business and finance show INTHEBLACK. Search for INTHEBLCK on your favourite podcast app today. And now back to With Interest.

Dr Jane Rennie:
Well, I wonder to what extent can we draw a line between the lack of younger business owners and things like social media and technology investment?

Gavan Ord:
So, our survey results have shown over 14 years that older business owners, 50 and above are particularly 60 and over are much less likely to be innovating, much less likely to be investing in technology, much less likely to be doing e-commerce, and social media. Now that doesn't mean that older business owners can't do these things, but they're just less likely to do this. And I think maybe one of the reasons for this is obviously they don't necessarily understand how to apply this technology in the business. But also if you look at some of the advertising by technology vendors, they aim at younger business owners. And I do think it's important that these technology vendors start to look at how do they promote their products to older business owners. And in Australia with more than half over 50, I think there's a huge market there, untapped market there they could focus on.

Dr Jane Rennie:
And as you said Gavan, that doesn't mean older businesses can't do this, they can't do the technology investment. We're not being ageist here, it's just that the survey results show they're less likely to do this, isn't that right?

Gavan Ord:
That's exactly right. It's just that they're less likely and that younger business owners seem to be much more likely.

Dr Jane Rennie:
So, exactly how dire could the situation get if Australia can't attract a younger cohort of business owners?

Gavan Ord:
Well, they often used phrase small business are the engine in the Australian economy, you'd have to say that the engine is not firing at all cylinders, while the age profile of small business doesn't match the general population. So until we can get more younger people into the business, we're not going to see the small business sector growing as strongly as it could. And that's partly because of all the technologies factors we mentioned before, but also innovation as well. So, we need to fill up the pipeline with younger people, and if we can't keep the funnel full, the economy just will keep splattering along. Productivity growth, which has been spoken about a bit last week, will also remain low. So, there's a whole lot of issues that need to be addressed, that can be addressed by bringing in younger small business owners.

Dr Jane Rennie:
You've called for a public inquiry into this issue Gavan, what exactly are you hoping might come of that?

Gavan Ord:
We'd like the inquiry to look at what are the motivations and barriers for younger people to enter small business. And we'd also like to see the inquiry come up with answers to those problems and concrete solutions, that could be an incentive scheme that supports younger people to open their business. It could include support to accessing advice, it could include even things like accessing capital. But I don't want to preempt what the answers could be, but I would like to have an open inquiry on open terms of reference that looks at potential solutions. It looks at the issue and the potential solutions, so we can all discuss it.

Dr Jane Rennie:
Returning to the survey findings more broadly, the survey also asked respondents to nominate the biggest challenges for their business. I was surprised to see that COVID is still nominated as the number one challenge, given that we didn't have lockdowns in Australia last year. I wonder, Gavan, is it possible that the new normal, the new business trading conditions are actually being blamed or put into the COVID bucket?

Gavan Ord:
Yeah, that's look at its possible that some businesses are just blaming COVID for everything. But when you look at some of the businesses, and the question was to 2022, so while we didn't have in Australia, we didn't have any restrictions, the full lockdown restrictions, we did see increased employee absenteeism due to COVID, we did see supply chain disruptions. So, there is still a COVID hangover there. And will the hangover last longer? Hopefully not, but hopefully we get a cure for this COVID hangover very soon.

Dr Jane Rennie:
I was also surprised to see that despite continual rate rises last year, Australian respondents said they found it slightly more easy or even very easy to access external finance in 2022 compared to 2021. Now I thought that with rising interest rates, I expected that businesses would've found it harder to get a loan, and I wondered how you might explain that result, Gavan?

Gavan Ord:
Yeah, so as I said previously, 2022 was actually pretty good year for Aussie businesses. And in an environment where the more businesses are growing, what we did see was banks and other lenders start to really compete for small business loans. We did see an increase in loans for growth, an increase in loans for buying equipment. So, at that time in 2022, there was definitely an increase in competition for that small business market. So, I think that helps to explain why accessing to finance was easier than what you might have expected. But this year might be a different matter because a higher interest rates and a tightening economy.

Dr Jane Rennie:
So Gavan, looking ahead into your crystal ball, what do you think is in store for Aussie small businesses this year? Are you hopeful that that upward growth trajectory that we saw in 2022 will continue?

Gavan Ord:
Well, the survey results show that slight improvement, but the survey was taken before, I think since the survey there's been two or three interest rate increases. We're now seeing data where the economy is slowing, retail sales are slowing. So, I think it's going to be a challenging well, and also there dare I say inflation is still on the way up, so I think it's going to be a challenging 2023. We may have gotten over COVID and while this still had a bit of a COVID hangover, 2023's presenting a new set of problems, higher inflation, higher interest rates are slowing consumer demand. So, it could be a challenging year for those businesses that adapt, and focus maybe more on lower price items. I think they could come out of it quite well, other businesses will struggle.

Dr Jane Rennie:
What about, do you have any other observations? Not from the survey, but just generally about Australian small businesses?

Gavan Ord:
One thing we have seen is trade receivable sales are down, so business to business transactions are down. Now this could be because businesses are reducing their inventory purchasing, they're running down the inventory in response to a tighter conditions. But it also could be because some of the supply chain issues, which I mentioned before, have faded and businesses have been able to return to just in time inventory purchasing. We know that during COVID, a lot of them, a lot of businesses shifted to bulk purchasing because they didn't trust their supply chains.

But now that supply chains are back and moving, we might see more of this just in time purchasing. So, that's down. The other thing that's interesting is we're seeing businesses do more credit checks of customers, whether individuals or business. So, I think there's just a reduced certainty about the viability of customers. So, businesses are now getting in there and going to credit reporting bureaus, and they're more often asking about the credit worthiness of a customer, and I think that's just a reflection of the caution that's being built into the economy at the moment.

Dr Jane Rennie:
That's all we've got time for today. Thanks very much to our guest expert, Gavan Ord. If you'd like to know more about today's topic, a link to CPA Australia's Small Business Survey Results and accompanying media release are included in the show notes. With Interest is a weekly podcast. If you like what you've heard today, why not subscribe on your favourite podcast app? From all of us here at CPA Australia, thanks for listening.

Garreth Hanley:
You've been listening to With Interest a CPA Australia podcast. If you've enjoyed this episode, help others discover with interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business, and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode. I hope you can join us again for another episode of With Interest.