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D&B Insights Winter 2013

This issue contains Australian small business and consumer insight – including risk and economic forecasts, consumer credit trends, business expectations, and government and industry news.

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D&B Insights Winter 2013

  1. 1. Winter edition 2013 Businesses say... NO NEW JOBS The employment outlook is at its lowest point since the GFC Consulting on cash flow Australian Government releases a discussion paper on late business payments Stress levels ease as savings swell Consumers’ focus on savings driven by unemployment worries Payment times indicate poor financial health Australian businesses are taking 54 days to pay their invoices Addressing economic constraints for MSMEs The role of bureaus in reducing information asymmetry and increasing credit access
  2. 2. 1 – D&B insight 3 4 5 7 9 10 11 13 14 Contents Fundamentally opportune Opportunities abound for well-managed companies In the current economic environment, which is plagued by mixed data, it’s easy to understand why many believe the economy is taking one step forward and two steps backward. These mixed results have been evident in the most recent round of data releases from the Reserve Bank of Australia, the Australian Bureau of Statistics and in our own commercial and consumer analysis. The latest credit statistics reveal marginal growth, with a 0.4 per cent increase over June in total credit provided to the private sector. Housing credit increased by the same amount, while other personal credit increased by just 0.2 per cent and business credit by 0.5 per cent. While it’s pleasing to see some growth, the expectations of businesses reveal that significant and sustained growth remains some way off. Australian businesses are telling us that their preference is to use the low interest rate environment to pay down debt, rather than take on additional credit to grow their business. In fact, just eight per cent of organisations are likely to seek finance for this purpose during the September quarter. Australian households are taking a similar approach, continuing their focus on saving rather than spending, and like the credit story for businesses, this attitude is unlikely to shift in the near term, particularly given the unemployment rate has ticked up slightly over recent months. The benefit to this de- leveraging of household balance sheets is a reduction in financial stress, as demonstrated by our Consumer Financial Stress Index, (see page 9) and a reduction in personal insolvencies as compared to the June quarter last year. Conversely, this focus on savings has obvious flow-on implications for businesses and this is continuing to show through in our Business Expectations Survey. Expectations for sales have trended down over the course of 2013 and profits expectations have followed a similar pattern, declining sharply following the Christmas period and flat-lining over recent quarters. Capital investment expectations have also taken a hit, falling from an index of 15 points at the start of the year into negative territory. Cash flow is another issue that has consistently posed a challenge for businesses this year and is often a key cause of insolvency. The latest trade payments data for Q2 this year reveals that companies are taking an average of 54 days to settle their accounts, which is flat from the previous quarter and one day slower than a year earlier. With all of this data in mind, the statement that follows will likely come as somewhat of a shock. “Now is the time for businesses to stop bunkering down and instead seize the opportunities that exist.” This statement does, however, come with a caveat. Only the businesses that have maintained an unwavering focus on the fundamentals of effective risk assessment and cash flow management will be in a position to take advantage of the opportunities available. These companies will be better able to weather whatever economic conditions come our way over the remainder of 2013 and into the New Year. And with the Reserve Bank indicating that our below trend economic growth will continue at least in the near term, the strength of their cash position will provide a buffer against slow sales. These companies may also be able to leverage their cash position to pursue acquisitions. Or, in the event their cash position requires an uplift to achieve this outcome, they can undoubtedly seek credit (and in a low A register reform reminder A timely reminder for businesses about the PPSR Consulting on cash flow Australian Government releases discussion paper on late business payments The Kiwi comeback The business risk conditions of Australia’s economic neighbour are on the up Businesses say no new jobs The employment outlook is at its lowest point since the GFC Stress levels ease as savings swell Consumers’ focus on savings driven by unemployment worries Comprehensive decisions: the new data environment Payment times indicate poor financial health Australian businesses are taking 54 days to pay their invoices Addressing economic constraints for MSMEs The role of bureaus in reducing information asymmetry and increasing credit access Small business, big credit opportunity Small firms are too big to ignore when it comes lending opportunities
  3. 3. Winter edition 2013 – 2 marketing list and then assess it against their existing portfolio, and credit risk and receivables objectives. This approach will allow businesses to ensure their marketing is targeted at organisations that have a good customer profile. Characteristics of such organisations include the potential to be high-profit customers (as is determined by the profile of existing high-profit clients), low credit risk and good payers. Importantly, there is also a message for those businesses that have room for improvement in the management of the fundamentals. Start today. Develop risk mitigation strategies and processes, and implement critical disciplines around receivables management and collections. Next, take the time to examine your existing customer book as you will want to avoid any nasty surprises. There is a wealth of data available that will enable you to acquire an accurate and up-to-date profile of your existing customer base so you can focus your attention on those customers that are at risk of becoming poor payers. For those businesses that have effectively managed their operations through an extended period of below trend growth and global turbulence, it’s time to take advantage of your position and seize the opportunities that exist. For others, it’s time to make the change and get your fundamentals in order. Gareth Jones Chief Executive Officer Dun & Bradstreet, Australia & New Zealand CEO insights Cash flow is the lifeblood of every business, yet many executives struggle to keep it under control. Gareth Jones shares his insights on good cash flow management. 1. Develop a cash flow projection and ensure you monitor and update it regularly. 2. Minimise bad debts with an established credit assessment procedure. 3. Establish an accounts payable policy at the outset of every credit relationship. 4. Establish a deposit policy for work in progress. 5. Monitor your customers’ use of credit andadjusttheircreditlimitsaccordingly. 6. Closely manage your invoice process and collections practices. 7. Rearrange annual payments such as insurance so you pay small instalments frequently. This will help to smooth out lumps in your cash flow cycle. 8. Select an appropriate source of funding for your requirements and pay the debt before the interest kicks in. 9. Use short term cash surpluses wisely, don’t keep them in accounts that don’t pay interest. 10. Conduct a credit check before extending credit to ensure a potential customer has a history of on-time payment. interest rate environment) given their solid cash base. For a company that’s held tightly to the reins and effectively managed through the GFC, the right opportunity may exist in the form of a company under pressure in an industry that holds long-term growth potential. Additionally, these companies are better placed to acquire customers from their competitors, and while all the data tells us that consumers and businesses are spending less, they are still spending. Taking advantage of these opportunities and gaining the maximum benefit available will not be a simple task. It will require the same focus on the fundamentals that enabled these companies to land themselves in a solid financial position in the first place. It will also require the smart use of data. First on the customer acquisitions front, rigorous risk assessment processes will be required. On-boarding customers that don’t pay on time, or don’t pay at all, will erode the solid financial position that a business has built. Second, the ever-important cash flow management. With a shifting economic environment comes a shifting outlook for customers. The days of simply checking customers at the outset of a relationship are long gone, with diligent operators committing to monitoring and managing their customer relationships on a monthly basis. This is the only way to ensure that you stay on top of your cash flow situation. The smart use of data requires a business to bring together all of its various information sources to ensure they have the best picture of where opportunities exist. A mass marketing list may have been enough in the past. However, in the new environment smart businesses will begin with a targeted Now is the time for businesses to stop bunkering down and instead, seize the opportunities that exist.”
  4. 4. 3 – D&B insight A register reform reminder A timely reminder for businesses about the PPSR With transitional provisions under the personal property securities law reform ending in January 2014, it’s worth businesses revisiting the details of the new Personal Property Securities Register (PPSR). The new PPSR was introduced in January 2012 as part of broad reform that has changed the way in which Australian businesses protect themselves against the insolvency of their customers. The register has consolidated more than 40 separate Commonwealth, state and territory laws and registers under one national system. Since its introduction, millions of registrations have been added to the PPSR, and millions of searches have been conducted. Businesses can search the PPSR when they need to know whether certain personal property has a security interest registered against it. The Australian Government’s PPSR website ( provides information on some of the more common questions and topics for businesses considering using the register. What can be registered? Property that can be included on the register includes almost anything except land and fixtures (such as buildings). Boats, machinery, crops, shares, art, intellectual property and contract rights can all also be offered as security for a loan and therefore included on the register. Why use the PPSR? Businesses can improve the way that they manage credit risk by registering their security interest in the goods they supply or lease on the register. If you do not register your security interest and a debtor goes into bankruptcy or is placed into liquidation, your position will be like that of an unsecured creditor. Secured creditors will Businesses can improve the way they manage credit risk by registering their security interest in the goods they supply or lease on the register D&B fast facts: Australian businesses 38% ...intend to delay significant business decisions or investments until after the election 59% ...expect no business impact from the level of the Aussie dollar 9% ...expect to have increased levels of sales activity 3% ...expect to increase their level of capital investment 8% ...will seek finance or new credit to grow their business be ahead of you when payments are made or assets distributed. Issues for businesses to consider •• What extent should you participate with the reform? •• Do you have security interests that are registrable and, if so, need to make a registration? •• When to register your security interests to ensure you are protected. Use of the register is not compulsory, however, organisations that take advantage of the PPSR are entitled to some powerful protections. The PPSR and reform may affect your business in a number of ways. Business owners dealing with property securities should ensure they understand the reform, especially with transitional provisions coming to an end in January 2014. Information for businesses about personal property securities can be found on D&B’s website: > ‘Credit Reporting’ > ‘Personal Property Securities’.
  5. 5. Winter edition 2013 – 4 Consulting on cash flow Australian Government releases a discussion paper on late business payments Australia’s long-running issue of slow business payments has been officially addressed, with the Australian Government kick-starting a formal consultation period in July. The Small Business Minister, Gary Gray, and Parliamentary Secretary for Small Business, Bernie Ripoll, have released a discussion paper on a Prompt Payment Protocol. The paper is intended to gather ideas from the business community on ways to improve late business- to-business payments, and the consequent impact they have on cash flow. As highlighted by Dun & Bradstreet’s quarterly Trade Payments Analysis (see pages 11–12), businesses are taking an average of 54 days to pay each other this year, and payment times have remained over 50 days since early 2005. As a comparison, companies in New Zealand are settling their invoices in an average of 41 days. “The release of the government’s discussion paper reflects the significance of the issue of late payments in Australia,” said Gareth Jones, D&B’s Chief Executive Officer. “When businesses have to wait more than three weeks beyond standard terms to be paid, it stifles their ability to invest in their business and grow, and also to pay their own suppliers and operating costs.” “When one business pays late it can force the other to withhold its own payments, which exacerbates the slow payment cycle. This pattern appears to be at play within the business community at the moment,” Mr Jones added. The Prompt Payment Protocol paper identifies the impact of poor cash flow, unclear payment terms and poor debt-collection practices as some of the significant issues being faced by Australian businesses. The paper also outlines five payment principles: communicating clearly; paying on- time; encouraging good business relationships; adopting a complaints resolution process; and identifying as a ‘Prompt Payment Leader’. The impact of a slow cash flow cycle is significant at a business and economic level as it limits businesses’ capacity to invest and grow, while also withholding millions of dollars of cash from the economic system. D&B has estimated that more than $19 billion annually is locked away by businesses that don’t pay the accounts of other firms within 30 days. Small businesses typically fare worse, due to their smaller cash reserves and dependence on trade credit to pay for operating expenses. Additionally, smaller operations are often reluctant to chase outstanding accounts for fear of compromising existing business relationships. “Small businesses represent 96 per cent of all enterprises in Australia, so the wider impact of late payments on the economy is substantial,” said Mr Jones. “If small enterprises are held back by late payments and are unable to grow their business, then that’s a significant handbrake on national economic growth, especially at a time when business activity and investment are weak.” This message was echoed by the government’s Small Business Minister, who hopes that the discussion paper will bring together businesses of all sizes in a conversation about late payments. “Delaying payment can often have a knock-on effect, because the delays are passed down the supply chain to those that can least afford them, often small businesses,” said Minister Gray. “Small businesses are at the heart of our economy and good cash flow is vital to enable them to invest, compete, grow and support Australian jobs,” he added. According to Minister Ripoll, the payment protocol will also encourage good payment practices. “Over time small businesses will have confidence in the certainty of payment when dealing with protocol signatories,” he said. “Any business – big or small – that signs up will be able to use the goodwill from making a public commitment to promote themselves as business leaders in prompt payment, building greater trust and sustainability.” The Prompt Payment Protocol discussion paper was released on 24 july 2013 and submissions can be submitted before 23 August 2013. Information about the government’s consultation can be found on the website of the Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education. Businesses expecting cash flow to be an issue Q3 2013 64% Yes 26% No 10% Unsure
  6. 6. 5 – D&B insight The Kiwi comeback The business risk conditions of Australia’s economic neighbour are on the up While business owners in Australia continue to wait for a lift in the nation’s patchy economic performance and drawn-out recovery from the global financial crisis, those operating across the Tasman Sea or trading with Kiwi businesses are enjoying more positive and stable conditions. Despite its size, relative geographical isolation and recent natural disasters, New Zealand has staged a solid recovery from the GFC, with its 2013 performance in particular providing a boost to trading conditions and optimism. The improvement in the business environment has also been bolstered by a more confident consumer outlook. Although the importance of the two countries’ trading relationship weighs heavily to New Zealand, it has provided an impressive example to Australia in terms of commercial and economic efficiency. Accordingly, and given the country’s proximity, lower currency and similar commercial and societal characteristics, a number a growing number of Australian businesses have been ‘near-shoring’ their operations to New Zealand where its stable trading environment offers an advantage over other regional locations. An improving risk picture According to Lance Crooks, General Manager of Dun & Bradstreet New Zealand, the business risk environment has improved along with its economic indicators. “Stronger economic conditions and a solid growth outlook have no doubt turned the eyes of many foreign operations to New Zealand.” “Companies doing trade in New Zealand or with New Zealand-based firms have confidence in the local economy and its low level of commercial risk,” he said. D&B’s latest country report for New Zealand shows that its risk indicator was upgraded during the second quarter of the year. With a DB2b rating, the New Zealand economy is considered low risk, with a low degree of uncertainty for companies doing business in the country. In comparison, and despite still sitting within the lowest risk band, Australia is listed as on a ‘deteriorating’ trend due to its adverse mix of political, commercial and economic developments. The D&B risk indicator provides a comparative and cross-border assessment of the risk of doing business in a country, considering factors that could affect the predictability of export payments and investments, including political, commercial, external and macroeconomic risks. “Following some lean years after the GFC, businesses have become more efficient, with their productivity and profit growth improving as a result,” said Mr Crooks. “A stable local environment is delivering confidence to companies operating in New Zealand to pursue further growth, despite lingering worries about the global risk picture.” Trade payments certainty Certainty of business-to-business payments has been an important factor in New Zealand’s improving trading environment. D&B’s analysis of trade payment data shows that businesses have been settling their accounts in around six weeks throughout the past 12 months, with payment times declining year-on-year to 41 days in Q2 2013. The improvement in the capacity of New Zealand businesses to pay each other in a more timely manner reflects their more stable financial position. Typically, companies with healthier cash flow are better equipped to pay each other sooner, while those that are cash- constrained will delay payments. “Companies have continued to reduce their payment times in spite of the impacts of the recent drought and earthquakes,” said Mr Crooks. “This points to a resilience in the local economy and also the prudent management of cash flow by local businesses.” Payment cycles in the agriculture sector in particular have fallen, with farming confidence improving after the country’s longest running drought in decades ended. On average, businesses in the agriculture sector have been paying their invoices three days earlier than they were at the beginning of the year. It is, however, New Zealand’s economic reliance on export and agriculture trade, in particular with China where growth has softened, which remains an area of potential concern. China is ranked 48th on D&B’s country risk table, with a DB4a rating, a AUSTRALIA DB1d Norway DB1d Sweden DB1d Canada DB2a Finland DB2a Germany DB2a Switzerland DB2a Hong Kong DB2b NEW ZEALAND DB2b Top countries D&B risk reports – July 2013
  7. 7. Winter edition 2013 – 6 moderate rating which suggests there is significant uncertainty over expected returns, with risk-averse customers advised to protect against potential losses. Strength in numbers A look at the macroeconomic numbers in D&B’s country analysis underscores the positive outlook for New Zealand businesses (see chart below). Real GDP growth is forecast to increase from 2.0 per cent this year to 2.8 per cent in 2014, and then trend within this range through to 2017. Likewise, inflation is forecast to lift from 1.6 per cent to 2.0 per cent as the effect of the country’s continued low interest rate levels and strengthening consumer confidence lifts prices. This favourable medium-term monetary and fiscal trajectory, combined with boost from post-earthquake reconstruction could see the government achieve a budget surplus by 2014– 2015,deliveringadditionalstabilitytotheeconomy. The combination of these elements has given companies motivation to prepare for further growth and invest in their business. This has been particularly evident in the improving unemployment rate in the New Zealand economy. After reaching a 14-year high of 7.3 per cent in the September quarter of 2012, national unemployment has fallen for two consecutive quarters to reach 6.2 per cent at the end Q1 this year. D&B’s country risk report has forecast unemployment to be at 6.8 per cent through 2014. With economic activity looking positive through the remainder of this year and into the next, businesses have been positioning themselves for expansion by hiring new staff, which is in contrast to the creeping level of unemployment in Australia. Consumer stress and caution Levels of consumer financial stress have dropped markedly in New Zealand during 2013 as stronger economic conditions buoy the financial position of consumers, with Kiwis also increasing their appetite for credit. After peaking in late 2012, financial stress has been steadily easing, reflecting other positive measures of the national economy, such as the unemployment rate. D&B’s Consumer Financial Stress Index, which measures consumer demand and capacity for credit, fell to -3.7 points in June 2013, having previously reached 14.1 in December 2012. “The Consumer Financial Stress Index reflects the recent change in conditions and also matches what we’re finding in our other research,” said Mr Crooks. “Kiwis are reporting that they are more comfortably meeting their financial obligations, like credit cards, loans and electricity bills, and that they expect to reduce their future levels of debt. “As a result, financial stress is easing and consumers are regaining their appetite for new credit – although we expect that a cautious approach to spending is likely to continue for some time,” he added. Falling consumer financial stress is another welcome sign for New Zealand, and it is likely to continue to benefit from the steady, low level of interest rates, falling unemployment and strong house prices. Businesses will be hoping that the next economic phase includes a lift in discretionary spendinglevels,givenfurtherresearchwhichshows that despite the positive conditions, consumers have maintained a focus on saving money. D&B has found that 39 per cent of New Zealanders are more likely to save money in Q3 2013 compared to the same time last year, while 28 per cent are less likely. Consumers have now held this same level of savings intentions for three consecutive quarters despite New Zealand’s economic pick-up through the year. “Having come through the GFC in good shape, the New Zealand economy is well placed to take advantage of a global pick-up in growth,” said Mr Crooks. “Despite some concerns about conditions in trade-destination countries, companies should feel optimistic about the fundamentals in the economy and our stable business environment,” he added. New Zealand’s economic indicators Real GDP growth Inflation Government balance Unemployment Current account balance 0% 8%-6% 2013 2014 +1.6% +2.0% +2.0% +2.8% -3.8% -1.8% +7.0% +6.8% -4.8% -2.9%
  8. 8. 7 – D&B insight Businesses say no new jobs The employment outlook is at its lowest point since the GFC Australian businesses don’t plan to employ new staff in the months ahead in an indication they expect the period of weak economic growth experienced so far in 2013 to continue through the remainder of the year. Dun & Bradstreet’s Business Expectations Survey reveals that the hiring expectations of businesses have declined for six consecutive quarters, with the employment index for Q3 2013 falling to -3.3 points, its lowest level in four years. An index in negative territory indicates that a greater number of businesses intend to reduce their employment levels than hire new staff. With the exception of those firms in the transportation, communications and utilities sector, which recorded a flat result, businesses from all of the industries surveyed expect to decrease their employment in Q3. Companies in the construction, manufacturing and retail sectors expect the greatest level of employment reduction. With actual employment activity across the past year tracking downwards with the survey’s forward-looking index, these findings suggest that the recent series of company job cuts and off-shoring announcements will not be in isolation. Operating costs, weak sales and slow cash flow appear to be limiting businesses’ capacity to hire new staff, while an uncertain economy and this year’s election are factors affecting demand for new labour. “With little spark to be found in the local economy, businesses appear wary of investing, instead focusing on their core business and controlling their expenses at a time when operational costs are high,” said Gareth Jones, D&B’s Chief Executive Officer. “This is a continuation of what businesses have been telling us throughout the first half of the year – that they won’t seek new credit to grow their business and that they won’t be increasing employment and other significant forms of business spending,” he said. During 2013 the monthly Business Expectations Survey has shown there is a steady decline in overall business spending intentions, with the capital investment plans falling in tandem with the hiring outlook. The survey’s capital investment index has reached a four year low of -1.5 points for the September 2013 quarter, well below its 10-year average. While assisted through the middle of the year by a falling dollar, businesses in the manufacturing sector have led the decline in the outlook for capital spending. Manufacturers have been noticeably affected by a soft domestic economy, however, all of the sectors surveyed appear to be forecasting a continuation of slow growth. Consistent with restrained spending plans, Australian businesses are continuing to turn away from new finance. Only 7.9 per cent of businesses responded that they intend to seek finance in Q3 to help their business grow. This follows a response of 2.5 per cent in May, and 3.9 per cent in April. According to Mr Jones the subdued appetite for borrowing indicates that businesses don’t anticipate a significant pick-up in activity or growth. “It appears businesses don’t see any substantial improvement in trading conditions in the new financial year to cause them to prepare for growth, while the election is also creating uncertainty and dampening new activity,” he said. Employment March Quarter 2010 – September Quarter 2013 MAR 2010 0 -10 -5 5 10 JUN SEP DEC MAR 2011 JUN SEP DEC MAR 2012 JUN SEP DEC MAR 2013 JUN SEP Net%withincreases -3.3% -4.8% Actual Expected
  9. 9. Winter edition 2013 – 8 Issues expected to influence businesses during the September quarter 2013 14%of executives anticipate that the level of interest rates will be the issue that most influences their business. 29% of businesses expect cash flow will be the major issue for their operations, while 21 per cent report fuel prices. 38% of businesses do not think the outcome of this year’s Federal Election will have any affect on their business. 42% of companies consider that utilities and operational costs will be the biggest barrier to growth, followed by a slow growth in demand for their products (25 per cent). 59% of businesses expect that they will experience ‘no impact’ from the current level of the Australian dollar, while 15 per cent expect they will experience a ‘significant positive’ impact. 68% of businesses do not intend to seek finance or new credit to help their business grow. “We know that businesses often defer major spending until after an election, however that appears to be only one piece of the puzzle. We are seeing a generally weak outlook across all of the survey’s indices.” According to the Business Expectations Survey, 25 per cent of businesses view a weak demand for their products as the biggest barrier to growth in the September quarter. This is reflected in the survey’s low sales expectations index, which has fallen steeply from 13.5 points in the previous quarter to 4.9. In addition, the profits index for Q3 has edged lower to 13.2 points, compared to 14.2 in the previous quarter. This softer outlook appears to have been impacted not just by lower sales expectations, but also the cost of doing business. Forty-two per cent of executives surveyed view operational costs as the factor most likely to limit their future growth. “The business sector is unambiguously preparing for weaker activity, with broad-based declines in the key components of the D&B Business Expectations Survey,” said Stephen Koukoulas, Economic Advisor to D&B. “Of most concern is the scaling back in employment intentions, which points to net job shedding and a rise in the unemployment rate in the next few months,” he said. “While there appears to be some pick-up in expected selling prices on the back of the recent fall of the Australian dollar, this is from a historically low base and a more minor consideration for businesses given the more problematic big-picture view of the economy,” Mr Koukoulas added. Biggest barrier to growth Q3 2013 42% – Operational costs 25% – Demand for products 15% – Outstanding accounts receivables 9% – No major barrier 5% – Access to funding 4% – Access to skilled labour Want a better return on your sales and marketing investment? Ineffective prospecting and segmentation often drive down campaign ROI. Find prospects with the highest propensity to buy. Access Australia’s largest business database to deliver the right campaigns to the right targets. 13 23 33
  10. 10. 9 – D&B insight Stress levels ease as savings swell Consumers’ focus on savings driven by unemployment worries Consumer financial stress is progressively easing this year as Australians continue to shore-up their financial position in the aftermath of the global financial crisis and as unemployment creeps higher. With the unemployment rate edging up to 5.7 per cent in June, its highest level since September 2009, the consumer attitude towards increased savings which was established following the GFC looks set to continue. Household savings as a proportion of disposable income have been maintained at above 10 per cent for the past five quarters, lifting to 10.6 per cent during the first quarter of the year, according to the Australian Bureau of Statistics. This focus on savings, combined with low interest rates, appears to be assisting Australians’ ability to meet their financial obligations, with Dun & Bradstreet’s Consumer Financial Stress Index moderating during 2013. The index, which measures consumer demand and capacity for credit, ticked downwards in June to 18.0 points, its lowest point since November 2012. Although still at an elevated level, the downward trend is a sign that financial prudence is translating into a more stable financial position. Australia’s falling interest rate levels throughout the past 18 months have also enabled consumers to more easily meet their debt repayments, reducing the burden of financial obligations including mortgages, personal loans and credit cards. Regular and timely repayments of bank loans are becoming more important for consumers, with recent changes to the Privacy Act introducing provisions for late payments to be recorded on personal credit reports. “If there’s been a personal finance positive to take out of the global financial crisis, it’s been the recalibration of Australians’ attitude to savings,” said Steve Brown, Director of Consumer Risk Solutions at D&B. “We know that job security is a major factor in consumer confidence, and so with the unemployment rate creeping up it’s not surprising to see that people are being more conservative with their money.” “Although this attitude doesn’t necessarily assist the position of businesses, which are eager to see people spending again, the continued focus on savings is a sign that consumers are aware of the fragility of the economy and are ensuring they consolidate their financial position.” “While D&B’s analysis reflects this financial prudence, the financial stress index is still relatively high, a reminder that the broader economic performance is weak,” he added. Reflecting the economy’s irregular performance, financial stress levels during June in mining-strong Western Australia (3.4), Queensland (9.9) and the Northern Territory (-1.4) remain well below the nation’s most populous states, New South Wales (26.8) and Victoria (23.5). Despite its current low index and the strength of its economy through the post-GFC years, however, WA’s financial stress level is trending upwards. During June it was the only state to see a rise in its index, which across 12 months has increased from -0.1 points to 3.4. The movement in the WA index parallels the state’s increasing unemployment rate, which has been creeping upwards since mid-2012. According to the ABS, the June 2013 unemployment rate in WA was 4.9 per cent, compared to 3.5 per cent the previous year. “The fall in consumer financial stress fits with the overall level of consumer sentiment being a little above its long run average and is the result of low interest rates, subdued credit growth and rising real wages,” said Stephen Koukoulas, Economic Advisor to D&B. “It suggests that consumers might soon be in a more favourable financial position and will therefore be poised to increase their spending, especially if there are further interest rate cuts this year.” “A pick-up in employment growth would also see financial stress levels fall further,” he added. Consumer Financial Stress Index Q3 2009 0 -15 -10 -5 10 5 15 20 25 Q4 Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2 Q3 Q4 Q1 2013 Q2
  11. 11. Winter edition 2013 – 10 Comprehensive decisions: the new data environment While the credit industry waits to see who the early adopters of comprehensive reporting data will be, one thing is clear: there will be benefits to moving with the new credit environment. Research by Dun & Bradstreet has found that credit providers will experience improved decision making including a 10 point increase in the Gini-coefficient (scorecard performance). Swap-set analysis reveals providers would also see either a 27 per cent improvement in their ratio of good-to-bad accounts, or a 40 per cent reduction in the reject rate with the same ratio of good-to-bad accounts (assuming a 15 per cent reject rate in the existing credit environment). While these findings reveal the advantages, the way in which credit providers utilise new comprehensive data will vary. Strength in numbers This is where it gets interesting for credit providers in the new environment. According to Vaughan Dixon, Director of D&B’s Analytics and Decision Centre, if there is only one credit provider reporting the additional credit information available under the new legislation, then the benefit will be limited to that single organisation. “At the point when two credit providers begin supplying comprehensive data the benefit becomes immediate and grows with each additional, participating provider,” Mr Dixon said. “The multiplying benefit of participating will continue to a point where those credit providers still on the sidelines will have their competitive position eroded.” “Knowing this, it is likely many credit providers will prepare their systems and push the ‘go button’ the moment some of the larger lenders lead the way,” he added. Early adoption of the new data may be rewarded with industry incentives. That said, while the big credit providers will be ready to take advantage of the change, the recommendation for smaller organisations is to have their systems in place and start contributing as soon as feasibly possible. A two-speed approach It is likely there will be two distinct groups that use the data available in the new environment. Conservative credit providers will be looking to move more slowly and potentially retain their existing scorecards, policies and processes. They will constantly review the available data and begin to include the information into their processes when ready. “Innovative credit providers, however, will look to take advantage of the new data from day one as they seek to strengthen their credit position” said Mr Dixon. “These businesses will look to lead the market by taking advantage of new credit bureau scores that will provide a single risk estimate across existing and new credit databases.” Providing data to credit bureaus A lot of work has been undertaken to standardise how comprehensive data is provided to credit bureaus. Significantly, a single data file will be accepted by all credit bureaus, ensuring that the data is comparable. This will provide real choice to credit providers when deciding which bureau (or bureaus) they will use. New data, new decision systems Today, access to multiple credit bureaus can help identify additional information, such as when incremental adverse data is held by a second bureau (no single bureau has the full picture). Many organisations are looking to implement bureau hubs which will take data from a number of credit bureaus, and then de-duplicate and merge the data into a single, combined picture of an applicant’s credit activity. In this scenario, a decision system should allow for the inclusion of existing scorecards and policies with new data to ensure maximum value for the credit provider as early as possible. According to Mr Dixon, smaller credit providers should ensure their decision tools support the new data and provide built-in access to all credit bureaus. “This will ensure that control over decision making remains with the credit provider and not with a software provider or credit bureau.” The Kiwi example There are examples to take from New Zealand, where the first credit providers are contributing comprehensive data. The tipping point for participation in the expanded credit environment is close, and credit providers and bureaus in Australia will benefit from seeing how the new data is implemented into decision making tools across the Tasman. Early adoption of the comprehensive data may be rewarded with industry incentives. Smaller credit providers should ensure their decision tools support the new data and provide built-in access to all credit bureaus.
  12. 12. 11 – D&B insight Australian businesses are taking longer to pay each other in 2013 compared to a year earlier, in an indication that their level of financial health has not improved. Despite edging down in the June quarter, businesses are taking 54 days to settle their accounts this year according to analysis of more than 8 million trade payment records by Dun & Bradstreet. Business payment times provide accurate insight to the financial health of businesses – those with available cash tend to pay their accounts in a timely manner, while cash-constrained businesses pay late. After trending at around 53 days from mid-2011 until the end of 2012, payment times have edged up during 2013, suggesting that business cash flow remains an issue. These findings, from D&B’s Trade Payments Analysis, reveal the challenging conditions being negotiated by companies and highlight the relevance of the Australian Government’s discussion paper on improving small business cash flow, which was released in July. After increasing steadily following the global financial crisis, trade payment times in Australia improved through 2011, and again in mid-2012. These improvements, however, have been reversed across the past six months in particular, as the pressures of the current business environment impact the capacity of companies to pay their costs. “The slowdown in the time that businesses are taking to pay each other suggests that business conditions are not improving, and the proximity of a genuine economic pick-up is still some time away,” said Tim Lord, President of D&B. “Despite low interest rates making access to credit more affordable, businesses’ ability to pay their invoices in a timely manner appears to be deteriorating in the face of weak sales activity and high operating costs.” “This is particularly concerning because of the strong link between cash flow problems and business failures,” Mr Lord added. According to findings from D&B’s Business Expectations Survey, 67 per cent of businesses expect that cash flow will be an issue for their operations in last quarter of 2013, suggesting that there will be no near-term improvement in the current trade payment numbers. At an economic level, Australia’s slow payment cycle is withholding millions of dollars of cash from the system at a time when growth and business activity is weak. The effect of this is especially pronounced among small businesses, which rely on trade credit to pay for operating expenses. This impact of slow payments on small businesses has been highlighted by the Australian Government, which is consulting on how to improve small business cash flow and strengthen business relationships. The government has released a discussion paper on a Prompt Payment Protocol, to help generate ideas about how to address the issue of late business payments (see page 4). At an industry level, D&B’s Trade Payments Analysis shows that businesses in the retail and mining sector have been the slowest to settle their accounts in the first half of the year, taking 57 days, while utilities companies have taken 56 days. The nation’s fastest paying companies have been those from the transportation sector, which have paid their business accounts in an average of 50 days. According to Stephen Koukoulas, Economic Advisor to D&B, the news on payments time is Payment times indicate poor financial health Australian businesses are taking 54 days to pay their invoices Australian business payment times Q3 2009 52 49 50 51 54 53 Days 55 56 57 Q4 Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2 Q3 Q4 Q1 2013 Q2
  13. 13. Winter edition 2013 – 12 50 58 Agriculture 54 56 52 Days M ining Construction M anufacturing TransportationCom m unications Utilities W holesale trade Retailtrade Finance,insurance, and realestate Services TOTAL Q2 2012 Q2 2013 open to a number of interpretations. “An optimist would say that the consolidation in payment times in the June quarter, at a level below the 2011 and GFC peaks, is a sign that low interest rates are slowly making their mark.” “However, a pessimist would note that payment times remain somewhat elevated and that there is a risk they rise further if the rate of economic growth remains below trend,” Mr Koukoulas added. “Further interest rate cuts from the RBA and the lower Australian dollar will no doubt boost business conditions, with a lag, so there are grounds to expect payment times to fall back in the next six to 12 months.” Trade payments analysis D&B holds more than 8 million trade payment records, which are a highly predictive data set and a critical element in credit risk scores and the forecasting of business failures. The distinct advantage of trade information over other forms of company data is its ability to provide insight into current performance. Company financials, which are considered to be critical to effective decision making, are reported relatively infrequently and as a consequence, organisations may be required to make decisions using data that is up to 12-months old. Conversely, because trade payments information is reported monthly, it reveals how an organisation is paying its existing obligations. Trade data is also effective across all business sizes, being the most predictive element in small and medium business risk scores and the second most predictive (behind financials) in other credit scores. The predictive nature of trade data combined with its timely availability enables businesses to properly assess credit risk. Business payment times: by industry Outstanding debts? Outstanding collections. Dun & Bradstreet has Australia’s industry-leading rates for debt collection. With more than 50 years of experience recovering commercial and personal debts, D&B is the outstanding choice for your debt recovery investment. 13 23 33
  14. 14. 13 – D&B insight Addressing economic constraints for MSMEs The role of bureaus in reducing information asymmetry and increasing credit access Inadequate access to finance and credit represents one of the most critical constraints to economic development, particularly for rural and self-employed households and for micro, small and medium enterprises (MSMEs). Lenders often lack the necessary information to assess the creditworthiness of potential customers, including a lack of reliable and unique identification for individuals and businesses. In the absence of automated screening methods, the relative costs of personal screening and due diligence are very high, while the loan amounts tend to be modest. With limited access to inclusive and timely data, lenders are also concerned that borrowers might accumulate many loans from multiple lenders, potentially resulting in over-indebtedness and leaving lenders with an unacceptably large portfolio of non-performing loans. In markets faced with these challenges, credit reporting service providers can perform the crucial functions of gathering and distributing reliable credit information, improving creditor protection, and strengthening credit markets. Credit reporting service providers can reduce information asymmetry, thus reducing default rates, which in turn should result in lower average interest rates, enhanced competition in the credit market, and ultimately increased access to credit. Access to finance is an essential component to economic development and job creation. Many studies have shown a positive correlation between financial development and economic growth. Well-functioning financial systems offer a variety of financial products for savings, credit, and risk management to a wide range of people and enterprises. Access to financial services enables households to smooth consumption curves and acquire access to essential services including food, housing, health, and education. MSMEs require access to financing to meet short and long-term capital needs and to grow and expand their businesses. Access to finance is also critical for larger corporations and conglomerates. In developed economies, approximately 90 per cent of adults have access to formal financial services compared with 41 per cent in emerging markets. The total unmet need for credit by all formal and informal MSMEs in emerging markets today is in the range of $2.1 trillion to $2.5 trillion. Access to credit is largely hindered by the lack of sufficient information on the ability of a potential borrower to repay debt and the lack of supporting financial infrastructure to make such information available. In most markets, commercial lending is traditionally focused on large companies and select retail clients. The credit needs of smaller entrepreneurs and communities are primarily met through informal financial services and non-bank credit. Credit markets are typically characterised by a fundamental problem: that of asymmetric information, where the borrower knows the odds of repaying his or her debts much better than the lender does. The inability of the lender to accurately assess the creditworthiness of the borrower contributes to higher default rates and smaller loan portfolios. Lenders typically address these problems with collateral to cover loss in case of a default or by investigating a borrower’s ability to repay. Requiring collateral is often problematic, particularly in the case of new firms and MSMEs, which often lack significant assets recognised as useable collateral. In addition, the costs to lenders of seizing and liquidating assets used as collateral can be significant and the process lengthy. The unavailability of information at a low cost often restricts the ability of lenders to profitably lend to MSMEs. Monitoring and screening borrower behaviour is one way to minimise problems of asymmetric information. Past behaviour is a reliable predictor of future behaviour. For example, in many countries, banks commonly grant credit to a firm only after it has had an account with a bank for at least six months. This allows the bank to observe the firm’s cash flow. Nonetheless, the relevance of past behaviour should be considered in context, since it cannot explain all behaviour, and could be irrelevant when adverse economic conditions change the circumstances. The above excerpt is from the Credit Reporting Knowledge Guide (2nd edition), which was prepared by members of the International Finance Corporation Global Credit Reporting Program team under the direction of Tony Lythgoe. The guide focuses on the credit needs of individuals and the micro, small, and medium businesses that stand to benefit the most from the development of credit reporting systems. A copy of the guide can be found at: Tony Lythgoe shared his views on the global credit reporting environment at D&B’s Commercial Credit & Collections Conference. Credit reporting bodies perform the crucial functions of gathering and distributing reliable credit information, improving creditor protection, and strengthening credit markets.
  15. 15. Winter edition 2013 – 14 Small business, big credit opportunity Small firms are too big to ignore when it comes lending opportunities One of the striking statistics about the economy is that small firms make up 96 per cent of all businesses. While this statistic is not new, it deserves fresh attention given the slow crawl of credit growth in Australia post GFC, and the unique risk environment in which lenders are operating. Business credit increased by 0.9 per cent year-on-year, according to the RBA’s financial aggregates in May. Additionally, ASIC data shows that more than 2,500 companies have been entering into insolvency appointments each quarter for the past two years. With no obvious near-term event likely to improve this credit risk environment, credit providers will need to look deeper into the current lending pool for opportunities. This includes a closer examination of the risk profile of small businesses. Who are the 96 per cent? Although definitions vary on what a small business is, there are some general identifiers. Sixty per cent are unincorporated and most are home-based with no, or few, employees. Consequently, they also tend to have very little commercial credit history, instead opting to use consumer products to pay for operational expenses. According to Darin Milner, Director of Risk Management Solutions at Dun & Bradstreet, this is a significant characteristic of the unincorporated small business. “Because there is no distinction between the business owner and the business itself, understanding the commercial credit risk involves understanding the individual,” he said. “To adequately assess and price-risk unincorporated small businesses, commercial and consumer credit data needs to be blended.” Mixing it up When you mix commercial information with personal credit records a detailed business credit profile can be created. D&B has created such profiles on the more than one million unincorporated entities, with the information revealing a significant lending opportunity exists. The profiles show that: •• 70 per cent have no extensive financial obligations (defined as a registered charge or mortgage) •• 65 per cent have no history of an adverse credit event in the past seven years •• more than 55 per cent have made no more than one credit enquiry in the past two years. When a small business risk score is applied to this profile information, the size of the credit opportunity becomes more apparent. This risk score covers a business’s payment patterns, recent credit defaults and its credit enquiries. Payment patterns The way that a business pays its invoices is the most predictive element in small business scoring. This ‘trade payment data’ tracks the amount of time it takes for a business to settle its accounts and indicates its likelihood of paying late – or not at all. Time since last default While any adverse credit event is a clear indicator of risk, it is the time since the most recent negative event which provides sharper meaning. Analysis of this factor shows that an unincorporated entity whose owner defaulted on a credit obligation more than 24 months ago is half the chance of entering bankruptcy compared to one whose owner defaulted in the last 60–90 days. Volume of credit enquiries Another telling factor in a small business’s risk score is the volume of its credit enquires. The greater the number of enquiries, the higher the risk, particularly if those enquiries have occurred over a short period of time, such as a few weeks. By analysing these risk indicators, D&B has found that 40 per cent of the small businesses profiled would immediately return a score that qualified them for credit. That’s more than 400,000 credit opportunities brought to light under closer inspection. A clearer credit picture Due to their size, irregular structure and vulnerability to economic conditions, there’s no doubt small businesses can be a risky proposition for lenders. When considering the current weak credit environment, however, the sheer volume of small businesses presents a lending pool that is too substantial to overlook. “Because small business owners are often indistinguishable from their enterprise, blending data is the key for lenders,” noted Mr Milner. “Combining the personal credit data of small business owners with their commercial profile opens up a new and clear picture of this untapped credit market.” Because there is no distinction between the owner and the business, understanding commercial credit risk involves understanding the individual.”
  16. 16. 15 – D&B insight