Fiscal cliff or K-shaped recovery?

SME Savings rise

Key findings

  • Small and medium enterprises (SMEs) continue to be heavily impacted by the fallout from COVID-19. After recovering in June, the SME Index has fallen, impacted heavily by the Victorian restrictions.

  • Yet many SMEs have also been building a cash buffer against future uncertainty, with mean account balances remarkably doubling between April and September.

  • While the level of SME savings varies significantly between industries, businesses in Victoria report even higher levels of savings than those in other states – suggesting that government stimulus, lump sum payments and debt payment holidays are crucial factors, rather than simply the relaxing of restrictions.

From JobKeeper to loan guarantees and cash flow boosts, federal and state governments have taken unprecedented measures to support Australian businesses during the COVID-19 pandemic. Yet with programs already in place to tighten JobKeeper eligibility and reduce payments, it’s also clear those support measures can’t go on forever.

So how well prepared are Australia’s small and medium enterprises (SMEs) for a future with less government support? Are they at risk of falling over a much-discussed ‘fiscal cliff’?

To find out, we analysed data from GetCapital’s Cash Balance Index between January and September 2020. Based on the account balances of a representative sample of 5,000 businesses, the Cash Balance Index tracks changes in spending and saving patters for SMEs across Australia. Here’s what we found.

Building a buffer against uncertainty

Building a buffer

GetCapital Cash Balance Index

The data confirms that businesses continue to be seriously affected by COVID-19, with sales still ~20% below their March peak at the end of September. After briefly recovering in June with an end-of-financial-year boost, revenues retreated again in July and August, after the reimposition of restrictions in Victoria.

Yet at the same time, many businesses have been actively building a cash buffer to cushion themselves against future impacts. The last six months has seen consistent growth in cash deposits in SME accounts, helped by a range of factors including JobKeeper Payments, mortgage and loan deferrals, superannuation withdrawals, and other stimulus payments. That has helped to grow the SME account balances by a remarkable 100%.

Loan deferrals help businesses prepare

GetCapital Cash Balance Index

Businesses of all kinds and sizes have been actively working to build larger cash reserves – including those that have sought temporary loan repayment deferrals. While typically under greater financial pressure than their peers, these businesses have used the cash flow relief from deferred payments to build their savings, albeit at a lower level.

“These findings suggest that talk of a looming fiscal cliff is likely to be overblown,” says Jamie Osborn, GetCapital CEO. “While revenues are still down, SMEs have been taking advantage of extra cash flow from a raft of government measures that seek to boost working capital, putting businesses in a stronger position to weather future uncertainty. That makes it much less likely that the gradual winding down of support will impact the financial health of SMEs,” he says.

“However, that isn’t to say every business is equally well-prepared,” says Osborn. “One of the unusual features of this recession is the way COVID-19 has affected different industries in very different ways. That’s also clear in the savings data, which shows businesses in more severely impacted sectors are finding it much more difficult to save extra working capital.”

The K-shaped recovery

Impact by industry

Average account balances by industry

Looking at the data by sector reveals two diverging groups – with relatively resilient industries building savings rapidly, while others struggle to maintain working capital reserves or even going backward. The result is more of a K-shaped recovery rather than the much-discussed V or U.

Construction businesses have been the most successful in building cash reserves, with the average business now holding about 2.4 times more cash than in January. In contrast, businesses in the Fitness and Recreation Services sector were among the hardest hit by the coronavirus restrictions, with average account balances down 50% from January levels.

Remarkably, the data shows that businesses in Victoria have been somewhat more successful in increasing their savings than those in the rest of the country, with average balances increasing ~150% between January and September, compared to other states. This confirms that government support has been a primary driver in helping businesses build resilience, rather than any easing of restrictions to date.

Victorian businesses prepare

Average account balances by location

About the data

The GetCapital Cash Balance Index is calculated by analysing account balances from a representative sample of SMEs around the country, varied by size, industry, and location. Baselined to the start of the crisis, the Index is based on medium account balances for over 5,000 Australian SMEs.
The report has been prepared for information purposes only without taking account of the objectives, financial situation or needs of any individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. All material presented in this report, unless specifically indicated otherwise, is under copyright to GetCapital. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior written permission of GetCapital.