Experts are cautious about how long a boom in the New Zealand small business sector will last. The next six months could be key.
February figures from accountancy software firm Xero's small business index suggest some industries are powering through the Omicron outbreak, with the performance indicator rising to 114.5.
The index shows improvements or declines in the fortunes of small businesses relative to the previous month, measured against the industry average of 100.
Small business sales were up 13.3 percent compared to February 2021, despite the surge in Covid cases. The rise was led by strong performances in construction and manufacturing, which enjoyed nearly 17 percent and 16 percent increases, respectively.
The beleaguered hospitality industry is the only sector to suffer a decline in sales, down three percent year-on-year.
The data shows wages continued to rise, with a 4.3 percent increase in February compared to February 2021, on top of a 3.7 percent increase in January. SMEs in the construction sector had the biggest increase, up 5.5. But hard-hit hospitality businesses also saw a 5 percent increase in staffing costs.
“Sales figures and wage rates don’t tell the whole story. We know there’s been significant inflationary pressures on the sector. Some of the sales increase may actually be related to increased prices, which to a large extent is passed onto the consumer." Graham Burke, NZ Construction Industry Council
Graham Burke, chair of the New Zealand Construction Industry Council is cautiously optimistic about businesses enjoying a growth phase, but he warns there might be more to the story than meets the eye.
“Sales figures and wage rates don’t tell the whole story,” he says. “We know there have been significant inflationary pressures on the sector. Some of the sales increase may actually be related to increased prices, which to a large extent is passed onto the consumer.”
He also suspects the impact of the Omicron outbreak will show up only in the March and April reporting periods, due to the time delay in processing invoices.
Builders going under, boom or bust
Builders go bust in both growth and downturn periods, according to Burke, so they need to keep a close eye on their cashflow and profitability, particularly in an environment of limited supply of building materials.
“Cashflow is constrained by the fact you’re needing to come up with more money for buying materials before you get paid,” he says.
This means businesses might shell out more money to buy products and meet demand, while coming up against hurdles in getting goods because of supply chain issues.
Depending on their contract, builders might have to absorb some of these increasing costs, which could put real pressure on some businesses, he says.
“Manufacturing is a team sport, having people missing can affect your ability to operate" Catherine Beard, BusinessNZ
In this situation, growth can end up being a constraint on a company's cashflow, he says.
Dave Kelly, chief executive of Master Builders, says the boom won't last forever. While there’s plenty of work in the pipeline, he expects demand to plateau in the next six months following increases in material prices and delays in getting products.
Meanwhile, Catherine Beard, director of advocacy at BusinessNZ, says the manufacturing industry has bounced back after falling into a deep hole during the lockdowns.
The organisation’s manufacturing performance index for February 2022, which looks at manufacturers of all sizes, shows the industry is generally expanding, with new orders increasing to their highest level since July last year.
However, this needs to be balanced with the spread of Omicron potentially affecting business plans in the coming months, while supply chain woes and staff shortages weigh on manufacturers, she says.
“Manufacturing is a team sport, having people missing can affect your ability to operate."
