SME optimism cools as revenue & profitability soften

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The latest wave of the Fifth Quadrant SME Sentiment Tracker reveals more measured sentiment in March, with revenue declining and expectations regarding lower interest rates being reevaluated. Weakness in employee data is also notable. Despite these challenges, a significant portion remain growth-focused, cautiously balancing investments in capital equipment against a backdrop of economic uncertainty and shifting customer behaviors.

Profit

After a robust start to the year, 30% of SMEs have reported weaker revenue in March compared to 12 months earlier. Profitability has also diminished, with 27% of SMEs experiencing a loss, an increase from 22% the previous month.

Business Concerns

After a period of decline, concerns regarding inflation and interest rates have begun to trend upwards with 74% now concerned compared to 68% last month. Clearly there is growing apprehension among businesses that the anticipated rate relief may not materialise as soon as hoped.

Cost Recovery

Accordingly, many SMEs continue to adopt efficiency and cost-cutting measures, including discontinuing unprofitable products/services (26%) and streamlining business operations (23%).

People

Employee data is also weakening, with 19% of SMEs reporting fewer employees than 12 months earlier. Consequently, the proportion of SMEs anticipating staff increases over the next three months has also declined and only 20% of SMEs are currently seeking to fill positions, compared to 27% in January.

Business Challenges

Despite weakness across most key performance indicators, growth expectations remain robust, with 37% of businesses targeting growth over the next 12 months. However, this marks a decline from the spike to 44% recorded last month. Notably, growth-oriented businesses are acutely aware of the numerous challenges that could temper their growth expectations, with the economic outlook (42%) being the primary concern, followed by changing customer behaviours (34%) and workforce productivity issues (19%).

business investment

Despite ongoing caution, SMEs are maintaining their investment in capital equipment, a trend anticipated to continue as they seek to capitalise on tax concessions available before the financial year ends. 27% of SMEs will increase their capital investment over the next 3 months up from 20% last month. This illustrates a careful balance between managing costs and seizing opportunities to drive business growth.

Finance Needs for the next 3 months

However, the demand for additional finance over the next three months has decreased to 12%, down from 20% in December 2023. This trend suggests that most SMEs intend to rely on cash flow and existing financial facilities for their investment needs, indicating a preference to minimise debt exposure until interest rates decrease.

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