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Why SMEs shouldn’t listen to business confidence surveys

While business confidence surveys may seem beneficial for businesses they actually can do more harm than good, according to Chris Baker, Auckland business coach and SME commentator.

He says, reports such as the ANZ Bank’s recent business outlook survey are necessary but tend to scare SME owners into inactivity.

“In my experience [...] headlines like ‘Business confidence drops again’ can have a decidedly negative impact on activity. Business owners stop acting pro-actively, and they stop spending,” says Baker.

Baker says found this to be true when he observed the reaction of his clients to the ANZ Bank’s business outlook survey at the end of August.

The survey found 29% of respondents expect the economy to get worse over the coming year. In the previous month, 15% said they expect a deterioration.

“Small and medium business owners, and the self-employed, are not usually pessimistic until they get that that kind of news and, in my experience, that’s not good because the future turns out to be the way we expect it to turn out - simply because we don’t try as hard if we’re not optimistic.

“The irony is that most SME’s (fewer than 15 employees) have only a tiny fraction of a share of their market - usually 1% market share or less. When the economy is going along normally, that’s 1/100th market share.

“If the economy contracts 3% then they only have to get 1/97th of the market share to stay where they were. For a small business It doesn’t take a lot to maintain equilibrium,” says Baker.

Essentially this means the percentages are so miniscule an SME could get that much more business, and none of its competitors would even notice.

Positive thinking on its own, however, motivates action, says Baker.

To maintain momentum, Baker advises small businesses to take the following steps:

1. Calculate the amount of additional business needed to maintain current position. Set this, or more, as a target.

2. Revisit first principles. First principles include pro-active steps to: identify a target market; analyse the main business goal; understand what it is that the business is good at; know who the best customers are and if they know everything on offer to them.

3. Put more effort into growing sales, while also considering costs. Post recession, most businesses have already cut costs to the bone, so reducing expenses is probably not going to make much of an impact, says Baker.

Core costs, such as rent, telephones and power, usually stay the same, whether sales go up or down. This means a sales increase of just 10% can have a tremendous impact on a business. Businesses should set ambitious targets, he says.

4. Re-evaluate business. Understand where the business is now and where it could be by the end of the year (or at a future deadline) as a way of becoming more proactive.

“The first danger of a declining economy is the psychological impact because it leads to a slow down in activity or action. When people start talking things down, it’s time to step up the activity,” Baker says.