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Business Conditions Still Rocky

The Reserve Bank has announced that interest rates will remain on hold at 3%. There are some expectations by economists that the Reserve Bank could announce another cut in the next couple of months and, by later in the year, interest rates could start to rise.

The federal election will cause some uncertainty for many businesses, especially retailers, because, traditionally, customers reduce purchases during elections. Whether this is going to happen over the 6 month election period remains to be seen.

“An unhealthy cash flow cycle exists among Australian businesses, with 62 per cent of accounts settled late and firms taking on average, 52 days to pay their bills.” – Trade Payments Analysis by Dun & Bradstreet. This statement highlights the cashflow management problem facing many small business operators.

If that’s not enough, bank covenants are getting tighter. Interest cover is a minimum of two (number of times that interest charges are covered by EBIT (Earnings Before Interest & Tax):

• Debt Service Cover (the ratio of cash available for debt servicing for interest, principal and lease payments) – 1.5 trending up
• Current Ratio (the relationship between current assets and current liabilities) 2+
• Quick Ratio (the ratio between current assets minus stock and current liabilities) 1+

On a positive side, if you’re in the Information and Communication Technology (ICT), Transport (Freight) and Logistics and some Professional Services industries, there are some additional government grants by Enterprise Connect.

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written by:

McKinley Plowman