Automotive, manufacturing, printing and retail sectors burdened by debt: Grant Thornton report

The automotive, manufacturing, printing and retail sectors are being impacted most severely by tough economic conditions, according to some of Australia’s leading lenders.

A Grant Thornton survey of business finance lenders from 22 financial institutions Australia-wide revealed prolonged slow growth in Australia, outside of mining, was the primary difficulty impacting businesses.

Some 84% of respondents identified slow growth as having the most impact on businesses, while 77% also reported the slowdown in China’s growth as a key factor and 69% said businesses were being hurt by the Australian dollar exchange rate.

Grant Thornton national head of recovery and reorganisation Matt Byrnes said manufacturing and automotive businesses are under pressure from high cost bases and the challenge of tapping into export markets.

“We always encourage businesses in these sectors to have an export arm, as well as a local market, but the high Australian dollar has made exporting difficult,” he says.

“We’re also going to see a continuing of tough times for printing. I think the volume of printing is falling in a real sense and the cost to compete in that industry is also becoming higher.”

Byrnes says in retail it’s the top-end retailers which are doing it tough, as well as the single stores on high streets.

“We’re seeing a lot of stress thanks to high property values,” he says.

Retailers such as Lisa Ho and Blowes Menswear have collapsed this year.

Of the respondents, 30% expected default levels to increase in the next 12 months, and 23% expected corporate failures to increase. Sixty-three per cent of lenders expected the number of insolvencies to remain the same.

As a whole, the report revealed banks are more likely to work with businesses to try and overcome financial difficulties, than initiate formal insolvency.

The respondents said the key to success in difficult trading conditions is good management.

Ninety-one per cent of respondents said the highest contribution to financial distress was poor management decisions and 86% found poor financial controls also contributed to the failure of a business.

Byrnes says a strong management team ensures the right structures are in place within a business, employees are in the right roles and makes sure financial reports are given to management in a timely, regular manner.

“In many businesses which are struggling, they do not have these characteristics. Poor management and poor systems leads to poor decisions,” he says.

Other major reasons for businesses encountering financial distress included issues managing working capital, decline in revenues, an inappropriate business model and rising costs.

More than 50% of respondents’ borrowers had attempted to solve their business’s financial woes by implementing cost cutting programmes and reducing staff costs. But Byrnes says this isn’t necessarily the best strategy.

“The default position is to look internally and cut costs, and we’re not saying they shouldn’t, but there are opportunities out there for businesses. If they’re too internally focused they may miss out on these opportunities,” he says.

“For example in manufacturing, there are lots of opportunities for businesses to consolidate. The market is under pressure, but there are good businesses still operating, while others won’t survive.”

Other strategies which weren’t often considered included making more wholesales changes such as realignment of strategy, focusing on sales and marketing and implementing diversification or outsourcing strategies.

For businesses needing to source new debt or refinance existing debt, don’t expect it to be any easier in 2014.

The report revealed 63% of lenders thought the availability of debt would not change in the next year.

“In respect to access to equity finance there was an expectation in parts of the market that this will free up,” Byrnes says.

“But the view of the lender group is there will be no real change and it’s been tough to access finance over the past 12 months.”