MYOB SME performance indicator shows signs of stabilisation in Australian small businesses

Despite rising business failures and financial challenges, Australian SMEs are starting to stabilise and MYOB says February’s interest rate cut will drive growth.

Australian small businesses could be at the start of a turnaround in fortunes, according to MYOB. Picture: Flavio Brancaleone

Australian small businesses could be on the cusp of a tentative recovery thanks to February’s rate cut by the Reserve Bank, after high energy and labour costs, inflation and interest rates forced many to go out of business or face hardship.

MYOB chief executive Paul Robson said economic pressures on small and medium-sized enterprises seemed to be stabilising after a period of decline, and Australia’s ‘‘engine room’’ could now see growth, aided by lower interest rates.

The first interest rate cut by the RBA since 2020 is expected to provide relief for SMEs struggling with high borrowing costs and weaker consumer demand. Mr Robson said the cut would provide further support and growth for the sector.

“The No.1 thing SMEs tell us is impacting them right now is the cost of capital,” Mr Robson said. “Any movement on the cash rate has a pretty significant impact on SMEs.

“A lot of small businesses use debt to finance growth, and they don’t buy the next piece of equipment, they don’t upgrade their motor vehicle, they don’t take out that next lease in a high-­interest-rate environment.”

In a score derived from anonymised data from MYOB customers with fewer than 19 employees, measuring their contribution to the economy through gross value added (GVA) compared to national GDP, there has been a marginal rise. However, the score is still 0.2 per cent lower than June 2024 and 5 per cent below the end of 2023, signalling that while businesses are seeing some improvement, their overall performance remains weaker compared to last year.

The latest MYOB SME Performance Indicator shows that while small businesses’ economic contributions to GDP had been below trend, they are now aligning with broader economic performance. For the December 2024 quarter, the indicator showed a slight improvement, with the SME Performance Score rising by 0.3 points to -2.0.

“The SME community is a bellwether for the Australian economy. They’re key to the overall health of this country’s economy, so anything that takes the pressure off them, such as rate cuts, is good for the overall economy,” Mr Robson said.

Business failures have surged by 50 per cent this financial year as elevated operating expenses, cost-of-living pressures and an aggressive crackdown on unpaid taxes force companies to close.

Economic pressures have resulted in an alarming number of small businesses closing this financial year.

Figures from the Australian Securities and Investments Commission show 7483 insolvency appointments occurred in a record-breaking six months to December 31, a 47.1 per cent increase on the 5088 appointments a year earlier.

SMEs are grappling with a range of challenges, according to Mr Robson. Among the top issues are rising interest rates, inflationary pressures and in­creasing input costs, particularly energy prices.

He said red tape was a major concern for many, including hidden costs such as processing and membership fees, which were felt by businesses before they even generated revenue.

“The amount of red tape required to run or even set up a business remains a huge challenge. It’s not just the time and money to register a business entity, but also the costs of meeting industry regulations, professional qualifications, and memberships,” he said.

With small businesses accounting for about a third of Australia’s economic output, their financial health is seen as a key indicator of broader conditions. MYOB’s data, compiled in partnership with Impact Economics, showed many small business owners had absorbed financial pressures by cutting their own wages.

“In many cases, an SME just stops paying themselves the same amount of income, or paying themselves at all, in order to offset the increased cost of capital or the wider economic impact of inflationary pressure,” Mr Robson said.

Businesses in retail and hospitality continue to feel the effects of reduced consumer spending because of the elevated cost of living. In addition to this, operational pressures are high, with utilities a major source of pressure for small businesses.

Non-residential construction has held up better, with investment now about 5 per cent above pre-pandemic levels, while agriculture remains a bright spot, supported by strong commodity prices. However, Victoria continues to lag other states in overall SME health.