Businesses in rude health, time to wind back stimulus says ScotPac

Working capital giant says analysis shows taxpayer funds have not only supported SME’ finances, but improved them.

ScotPac chief financial officer David Rose said the data highlights a ‘new reality’ where many SMEs now have a better cash position than before COVID-19. Picture: NCA NewsWire/ David Crosling

Working capital giant Scottish Pacific is calling for a strategic withdrawal of the federal government’s COVID-19 stimulus measures, saying taxpayer funds have not only supported small and medium-sized businesses’ finances, but have improved them.

As Prime Minister Scott Morrison and Treasurer Josh Frydenberg prepare to release one of the country’s toughest budgets on October 6 to combat the sharpest recession in more than eight decades, ScotPac says the government’s support for business can be wound back more quickly than originally planned.

The Morrison government is looking to ensure that taxpayer dollars are focused on areas that can catapult the country from a recession and into creating jobs, as highlighted in the Prime Minister’s $1.5bn manufacturing plan announced on Thursday. ScotPac has analysed the working capital positions across its client base of more than 1100 businesses, which represent $20bn worth of annual trade, and found a “major increase” in borrowing headroom, which meant businesses could start to fend for themselves rather than rely on taxpayer support.

ScotPac chief financial officer David Rose said cash harvested from government initiatives had been used by SMEs to temporarily reduce their working capital facility drawdowns, with borrowings down 22 per cent.

Mr Rose said the data highlights a “new reality” where many SMEs now have a better cash position than before COVID-19, and supports a case for more targeted government support to replace current “broad brush” measures.

“The way we look at it is the government’s stimulus has done its work. It has not only supported businesses’ cash positions, which it was initially set up to do, it has improved them — and right across the board,” Mr Rose said.

“From a cash position, the companies are in pretty rude health and that’s because of that support.”

 

Mr Rose said ScotPac’s data hadn’t assessed whether taxpayer funds were being used to prop up companies that would otherwise have failed, even before COVID-19 struck.

“We haven’t sort of thought too much about whether they are zombie companies or not. A lot of the companies we deal with are very good companies, growing companies — we have got a real mix — but there is very strong cash support right across the economy. That’s the point we are making.”

Of the 1100 businesses analysed, ScotPac found 67 per cent experienced a drop in revenue from March to August 2020, with results varying by industry. But during this period, Mr Rose said businesses were also paying their peers faster.

He added that days sales outstanding — the number of days it takes for a company to be paid — dropped from 49 to 45, delivering a cash release equivalent to $150m.

“Much of this cash was used to reduce secured debt, as working capital borrowings reduced by 22 per cent.”

Mr Rose said interestingly, businesses in NSW had been hit harder than those in Victoria, despite the southern state experiencing one of the world’s harshest lockdowns for the past two months.

NSW businesses had a greater drop in sales volumes, down 23 per cent from March to August, compared with 13 per cent in Victoria.

“The fact that Victoria didn’t appear to be as hard-hit as NSW was a surprise, even allowing for the secondary lockdown in Victoria.

“We think that’s due to the fact that there is a much higher proportion of economic activity in Victoria that’s driven by construction and infrastructure development. There are also a lot of companies in headquarters Victoria that are exposed to the mining and resources sector, which has powered on quite strongly.”

He said ScotPac’s client base did not have a “huge representation” in hospitality, which had been one of the hardest-hit sectors. But Mr Rose said its client base was a “good representative sample of the rest of the economy”.

Mr Rose said the government now had the time to plan a targeted withdrawal of its support.

“A broad brush approach (helps) all businesses — good, bad or indifferent. But there is opportunity to be much more targeted now because you can arguably see those areas that have been the most affected and really start to wind it back in other areas that haven’t been affected much at all.”