Business growth

		“Our target is to grow the business by 50 per cent over the next three years. To do this we are focusing on four key areas: new innovation, growth by delivering value to existing clients, attracting new clients and developing the culture and our people.”
		“We are cautiously optimistic. We like steady and organic growth and we’re making sure we meet our targets. Hearing what’s happening overseas and with the recent natural disasters, it could take its toll on what is happening in Australia.”
		“Discretionary retailers, such as WOW Sight & Sound, have been hit very hard by the economic climate. We are very focused on increasing our profit. I don’t believe in the benefit of increasing sales if your profit doesn’t also increase. Our aim is to continue to be a profitable company, one that will survive ups and downs in the economy.”

Growth trend eases

Australian businesses are still growing, but the pace of growth has slowed and is once again at levels experienced during the global financial crisis.

Just over half of the businesses surveyed (56 per cent) reported having increased sales over the past 12 months, whereas 16 per cent said sales remained the same and 25 per cent reported a decrease. The average sales growth for the 12 months leading up to this issue of the PwC Private Business Barometer was six per cent, down from eight per cent in October 2010. Sales growth was strongest in Western Australia (nine per cent).

Over the same period, 44 per cent of businesses reported an increase in profits, while 31 per cent said their profits had decreased and 19 per cent said there was no change.

Compared to the previous two PwC Private Business Barometer surveys, the number of businesses reporting decreased profits has jumped by three percentage points. This may indicate businesses are still discounting or investing in marketing to boost sales.

Once again, Victorian businesses reported the strongest average profit growth (11 per cent) while NSW and Western Australia were below the national average (six per cent and five per cent respectively).

Despite a brief surge in profitability in March 2010, both sales and profits are on a downward trend, which is concerning for private businesses. We expect the Australian economy to take time to fully recover from the downturn and these results indicate private businesses can expect to wait for sales and profits to rebound. It will be interesting to see in the next PwC Private Business Barometer if this decline has continued.

Were revenue targets too ambitious?

More private businesses in this survey met or exceeded their revenue targets (62 per cent) than fell short (35 per cent). It is encouraging to see the number of businesses exceeding their targets has grown consistently since the global financial crisis. At their lowest point in August 2009, only 12 per cent of businesses surveyed said they exceeded their revenue goals. In another positive sign, the number of businesses that undershot targets (35 per cent) is slightly less than in the October 2010 PwC Private Business Barometer (37 per cent).		Businesses in Western Australia were the most likely to undershoot their revenue targets, with nearly half of businesses (48 per cent) in that state failing to meet targets. However, the number of businesses failing to meet their targets is still much higher now than it was before the global financial crisis. After the downturn, many businesses set ambitious targets, expecting a quick rebound. These figures may indicate that economic recovery has not been as strong – or as evenly distributed – as many business owners had hoped.

Successful businesses take credit

Businesses that performed well were happy to take credit for their success, while those that undershot their targets generally cited factors outside their control. Just over half (52 per cent) of private businesses that met or exceeded their revenue targets said their strategic direction was the key reason for their strong performance. Other explanations included the strong domestic economy (31 per cent) and new products or services (23 per cent).		Of those private businesses that did not meet revenue targets, the majority said the key reason was the state of the economy (51 per cent), followed by lack of consumer confidence (21 per cent). Only a small number cited internal factors, such as the business not being as competitive as it could have been (11 per cent), cutting back on marketing spend (four per cent) or poorly executing their strategy (four per cent).

Optimistic for the medium term but uncertain
about the year to come

As the Australian economy emerged from the global financial crisis, private businesses were very optimistic about their sales and profit forecasts for the 12-month and three-year periods ahead. As we have seen, this may have contributed to the relatively high number of businesses undershooting their targets in the current survey. In the latest edition of the PwC Private Business Barometer, firms were more cautious about the next 12 months, expecting an average 13 per cent sales growth, but were still optimistic for the next three years. The business services sector has set an ambitious target of 18 per cent sales growth for the coming year. Prospects appear less optimistic in the retail trade sector which is anticipating only 10 per cent sales growth, on average, in the next 12 months.		Business services firms also have high expectations for the medium term, with an anticipated 29 per cent growth in sales and a 27 per cent increase in profits over the next three years. Western Australian businesses have set themselves high shortand medium-term sales targets (17 per cent and 25 per cent respectively). However, past experience shows these goals may be overoptimistic. In this survey, 48 per cent of businesses in WA did not achieve their growth plans for the current period.

Organic growth still number one

When considering the source of their future growth, about half of all businesses surveyed said they would expand organically (51 per cent for the short-term and 49 per cent for the medium-term). Opening up new product markets was the next most popular choice (40 per cent for the short term and 45 per cent for the medium term).

When combined, domestic and overseas geographic expansion plans were the second most popular medium- term expansion strategy (49 per cent for the medium term and 39 per cent for the short term).

Are expansion plans on hold?

Businesses are saying they want to rely on organic growth until the economic situation becomes clearer before making firm plans for acquisition or geographic expansion. Only 20 per cent of businesses said they expected to acquire other companies over the next 12 months, but 28 per cent had acquisition plans for the next three years.

The emphasis on organic growth raises questions about whether private businesses will be able to achieve their expansion plans. This will be especially problematic for private businesses if their competitors are also focused on growing organically. PwC believes businesses that think outside the square and pursue alternative growth strategies will be better placed to achieve greater results.

Start making online plans

Surprisingly, even though consumers are buying ever more goods and services online, 39 per cent of retail businesses surveyed told us they had no plans to increase their e-retailing efforts. Only six per cent of retailers said they already had an established e-retailing strategy.

Less emphasis on impediments to growth

While businesses still view macroeconomic factors as the major potential impediments to meeting their growth targets, these issues are now considerably less of a challenge than they were in the October 2010 PwC Private Business Barometer. Businesses nominated consumer confidence as the primary impediment to growth (44 per cent of respondents, down from 61 per cent in October 2010). The global economic condition was a close second (42 per cent, down from 63 per cent). In general, respondents nominated growth constraints less frequently in the current PwC Private Business Barometer than in the October 2010 edition, which might indicate businesses are more optimistic and less worried about the state of the economy. Approximately one in seven businesses (14 per cent) said the natural disasters across the country in early 2011 would be an impediment to meeting targets. This edition of the PwC Private Business Barometer did not include Queensland-based businesses, which were most affected by natural disasters at the time of the survey.

Sale to private equity a growing option

Alongside other indicators of cautious optimism in the private business community, the share of respondents looking to exit their business grew slightly to seven per cent, up from a low of five per cent throughout 2010. This could indicate business owners are looking to realise value by selling their businesses to a third party or private-equity consortium. The proportion of business owners looking to sell to private equity increased from seven per cent in October 2010 to 13 per cent in March 2011.		At the same time, a sharp drop in business owners looking to sell to a third party (down from 31 per cent to 16 per cent) corresponded with a jump in those considering other exit strategies.

What would you like to grow?

At PwC Private Clients, we enjoy having conversations with business owners, directors, senior managers and the broader community about what they would like to grow. Growth is not just about sales or personal wealth; it’s also about growing as a person and – at a company level – becoming a more sustainable and involved corporate citizen.

As in the October 2010 PwC Private Business Barometer, nearly one third of respondents (31 per cent) said they would like to grow sales and profits. An increasing number of surveyed business owners and managers were looking to grow the businesses in other ways, such as expanding into other markets and services (10 per cent, up from five per cent in October 2010) and hiring or retaining more staff (10 per cent, up from three per cent).

However, private businesses are likely to encounter problems with staff retention, given the share of respondents who said they wanted to improve staff benefits and working environment dropped drastically from 19 per cent in October 2010 to just four per cent in the current survey. This may still reflect the post-global-financial-crisis sensibility of belt-tightening and focusing on fundamentals.

This question elicited a wide range of responses, with several suggestions around the operational side of the business such as greater efficiency, new technology, refurbishing the office and increasing customer satisfaction and retention.

Findings