EXECUTIVE INTERVIEW: Simon Glendenning, Regional Director APAC, Middle East & India - Western Union
- One in three SMEs negatively impacted by volatility – drops to one in five corporates
- 83% of Australian small businesses find it difficult to obtain credit - highest number recorded globally
- More than 70% of SMEs report that lack of credit had knock-on effect on cash flows
- 38% of SME exporters selling into Asia – further 31% to China and slightly more exporters are dealing with Australasia at 37%
- One in two corporates fix the cost of an invoice when they receive it – less than one in five SMEs currently hedging FX exposure
The Australian dollar has hit a six year low against the US dollar approaching the 0.70 cent mark and it is oscillating in a wide band. What segments are mostly adversely affected by currency volatility?
Anyone who has international exposure is impacted by volatility. With the data, however, we noticed an interesting disparity between how it impacted smaller SMEs compared to larger ones, which in our report are designated lower corporates (turnover between A$20 - 100 million). 33 percent of SMEs said that they were negatively impacted by volatility, whereas the number dropped to 19 percent for lower corporates.
A lot of that has to do with the fact that the majority of lower corporates have a hedging strategy and actively manage the risk associated with currency movements. Most small and mid-sized SMEs on the other hand don’t. It’s more of an awareness issue with these companies. They do not necessarily know that there are straightforward hedging facilities available to them and they leave themselves exposed, sometimes incorrectly hoping or assuming that the market will move back in their favour.
Over the last month, we have seen the Aussie Dollar move quite abruptly, which can wipe out entire profit margins, which can be devastating. The key is ensuring that we are doing our best to make sure that SMEs are aware of the tools that are available to them and working with them to help them build a manageable strategy that is simple to understand and implement.
From the Australian ITM research and anecdotal feedback from clients, is there a view that businesses are successfully obtaining credit and do they have the advice to successfully expand into offshore markets?
Unfortunately not. The survey found that the vast majority of companies – 83 percent – find it difficult to obtain credit, which is the highest number we saw anywhere in the world. That was quite surprising. While the number drops for lower corporates, it is still too high at 38 percent. You can imagine the impact that has on businesses. According to our results, more than 70 percent of SMEs said that lack of credit had a knock-on effect on cash flows.
Visibility is another big cash flow issue for SMEs, particularly if they have international currency exposure. It can be quite difficult to know what these different currencies are worth in local currency at any one time.
This lack of visibility is something that we work very hard on in order to help improve our customers’ cash flow line of sight. We’ve developed some easy tools that gives them insight into their exposure in real time; that means they can make more informed decisions on what to do about it. Often times, this could mean they need a short-term loan, or it could mean that there are enough funds there and there isn’t a need to go and source additional capital.
If businesses have to cover short-term funding gaps with credit, those gaps themselves start to become more expensive. Taking on more credit – assuming they are able to obtain it – can limit smaller companies’ ability to grow. For example, if an SME has to use its credit lines to cover FX exposure, they could find themselves unable to access additional credit more readily. That makes it even more difficult for even well performing and healthy SMEs to expand their business to perhaps use credit to purchase more stock, increase the speed in which they are able to get things to market, or even where they can source products from.
More must be done to help SMEs access credit and understand ways in which it can be utilised more effectively; it’s certainly an area that needs to be drastically improved for small businesses or you will see their working capital constraints continue to get worse and worse.
There is quite a significant impact the whole way down the Supply Chain in terms of the working capital constraints story. Of the 2500 Treasurers and CFOs interviewed, what was found to be the bigger concern for them?
Cash flow was the number one concern. For very small, or micro SMEs, over 70 percent said they were worried about cash flow, and as you move to mid-sized ones, the number grew to 80 percent. Margins are getting squeezed and the changing economic climate – if business are left exposed to that, and haven’t proactively hedged, even just on an invoice by invoice basis, they are exposed to fluctuations and the cash flow piece can become more difficult. If an invoice suddenly costs 20 percent or even 10 percent more than they expected it to, then we go back to that challenge where credit is required to cover things like payroll and short term costs and the cycle starts to get harder and harder.
Of those firms looking abroad, currently importing and/or exporting to certain countries, are there some that offer greater opportunities than others?
We see that a lot of Australian businesses are working within the Asia Pacific region. Even if you exclude China, Asia is the biggest market that SMEs are importing from. 43 percent of the businesses surveyed are buying from Asia, while China itself represents 36 percent of imports for SMEs.
If you look locally across Australasia, Australia and New Zealand, 32 percent of businesses are buying from that market. Looking at exporters, it is largely the same with 38 percent of SME exporters selling into Asia, 31 percent to China and slightly more exporters are dealing with Australasia at 37 percent.
We are certainly seeing a lot of growth with China despite recent events; more than 20 percent of businesses see China as a big opportunity in the coming years. Even with all the volatility and media associated with China at the moment, there is certainly no doubting the scale of opportunity that China represents for Australian businesses, both in terms of a place to source products and a market in which to sell.
Finally, in terms of coping with FX volatility, how prepared are Australian businesses for the cost of when foreign payables runs higher than planned?
This goes back to the first point, and the answer is not well enough.
Operating in a market like Australia, when even at the best of times the currency can be relatively volatile, and certainly times like now when it is very volatile, can be challenging and we see far too many businesses leaving themselves exposed to the risks associated with the currency moving against them.
Only 18 percent of SMEs fix the cost of an invoice when they receive it, compared to half of lower corporates. You can see the impact that has when you look at the initial feedback around the number of businesses that see themselves being negatively impacted by volatility. Again, it comes down to awareness. The hedging structures and strategies that lower corporates use are available to SMEs, they are just less conscious of them.
A hedging strategy can be very simple to manage and monitor, and similar to the cash flow management tools that we provide to SME customers, we are trying to make it easy to understand not just what the exposure is in the local currency at any one time, but also what to do once a business gets that line of sight. If you implement the right protective strategy, forecasting becomes easier, cash flow management becomes easier, and decision-making becomes easier because you know what your margins and costs will be. In the current economic climate, the businesses that have gone with a do nothing approach are really feeling the pain.