More businesses plan to increase their asset base this quarter compared to the first quarter of 2017 despite ongoing funding constraints, according to the latest Alleasing Equipment Demand Index (the Index).
This quarter, a total of 30.6 per cent of Australian businesses surveyed plan to increase their asset base. This is an increase of 5.0 per cent compared to the previous report in March where only 25.6 per cent of businesses cited intentions to increase their asset base.
Those who suggest they will increase their asset base intend to do so by 8.8 per cent this quarter, which compares with a figure of 6.5 per cent in the previous report.
These findings have shown that despite a turbulent 2016, the Australian economy is still on track for growth. Our previous research (March quarter) found many businesses were cautious when making any large financial decisions as a result of Brexit and the Trump presidency. However, this quarter businesses are more confident regarding financial decisions and are more positive about the local and global economy.
State versus state
On a state-by-state basis, businesses in New South Wales and Queensland are the most bullish about their asset finance programs. In New South Wales, 33.8 per cent of respondents said they intend to increase their asset base, whereas 31.4 per cent of respondents in Queensland said they will increase their asset base this quarter.
The number of businesses in South Australia that aim to increase their asset base has lifted marginally compared to the previous quarter (23.2 per cent this June quarter compared to 22.2 per cent in the previous March quarter). Results from this state are lower which could be a result of the ongoing energy crisis, leaving many businesses cautious about their next move.
However, figures in Victoria went backwards this quarter, with 29.4 per cent of respondents indicating they plan to lift their asset base this quarter, versus 31.3 per cent in the previous quarter. This comes as a surprise as Victoria’s population growth continues to climb rapidly which will inevitably result in a greater demand for service and infrastructure.
Funding squeeze persists
Although organisations surveyed for the Index indicate they wish to grow their asset base, businesses are operating in an environment of significant funding constraints.
According to the results, a majority (54.4 per cent) of businesses say cost of capital is a continuing drag on their operations.
Other funding obstacles include tighter credit controls, which 28.8 per cent of respondents cited as a major hindrance to business growth. A further 27.2 per cent said they had difficulty acquiring capital.
This reflects the Organisation for Economic Cooperation and Development’s (OECD’s) view that, rather than reduce the cost of capital, the prevalent low interest rate environment has resulted in a short-term view among investors, who are not incentivised to invest in innovation.
Equipment upgrades drives growth
Against this backdrop, however, a large proportion (41.2 per cent) of respondents acknowledge upgrading technology can provide significant business benefits. A total of 38.8 per cent of respondents stated that new technology can vastly improve business growth, with a third confirming that they plan to acquire assets this quarter, a rise of 4.4 per cent compared to the previous quarter.
The Department of Industry, Innovation and Science, 2016 report, ‘Australian business and digital maturity’, found that higher levels of digital maturity (embracing new and more advanced technology) could help increase productivity. An example of this was found from businesses who had implemented cloud technology with 46.0 per cent having found that moving to the cloud increased productivity and 34.0 per cent stating that it had reduced IT costs.
However, it’s not just digital technology that has the power to develop, robotics and machinery has seen huge advancements across a range of industries. For example, more and more farmers are using drones with ground based sensor technology to track and monitor crop yield, therefore increasing productivity and their profit margins.
To buy or not to buy?
Australian Bureau of Statistics’ research indicates domestic businesses will spend $52 billion on assets this year. According to the Index, 25.0 per cent of a business’s asset base will be leased or financed. This suggests $40 billion in assets will be purchased, versus $12 billion in assets that are likely to be leased.
Forty billion dollars is a substantial amount for businesses to have tied up in assets, particularly for those who are seeking capital for growth. Accessing alternative capital solutions would free up funds for investment in other areas of the business, whilst still enabling access to the latest technology and productivity enhancing assets. Ultimately, this shift would result in a quantifiable difference for Australian businesses and the broader economy.