ASBFEO explains the Small Business Pulse

Small business is the beating heart of our communities and our economy, so it is crucial to check the pulse of such an important sector to measure its health and vitality. It’s a significant responsibility running your own business and the unseen ‘business of running the business’ can be physically, mentally, and financially exhausting, says Australian Small Business and Family Enterprise Ombudsman Bruce Billson.

That’s why my agency, the Australian Small Business and Family Enterprise Ombudsman, has created the ASBFEO Small Business Pulse  to measure and communicate a small business ‘health check’.

Small Business Pulse provides a health check

The Pulse is an innovative combination of non-traditional and traditional data to produce an indicator of small business health. It’s a check of objective vital signs for the small business sector while also taking into account the ‘animal spirits’ that drive decision-making by the enterprising Australians who look for delicious opportunities as they navigate challenges they may face.

The first release of the ASBFEO Pulse shows that the business environment is about 25 per cent below the long-term average. Put another way, if you believe as I do that small and family businesses are the ‘engine room of the economy’, we have lost a cylinder in a 4-cylinder engine in the aftermath of COVID.

Most recently, the Pulse fell 0.6 per cent in August 2024, and over the past 12 months, it has fallen 3.5 per cent, pointing to a stabilising trend in a particularly challenging period. We will release a new Pulse check every three months.

What is clear from the Pulse is there continues to be a modest decline after the stark deterioration caused by the end of COVID-support and COVID-amplified changes in the structure of the economy, including inflationary pressures, skills shortages, supply chain challenges and pronounced margin squeeze, and the series of interest rate increases.

Higher interest rates impact small and family businesses’ financing costs and have profound implications for customers’ spending, preferences, and confidence.

The time-series for the Pulse covers the past eight years and has been developed by my agency over the past two years and ‘field tested’ with small businesses.

We created the Pulse in accordance with OECD best practices. It brings together a range of data sources that can provide early indicators of changes in small businesses’ lived experiences and motivations. This is particularly important when conditions are changing rapidly, which traditional sources of information and point-in-time surveys often miss.

The Pulse captures three broad areas that reflect the ecosystem for small business owners.

Sentiment: the human emotions and instincts that drive behaviour. This includes people considering starting a business, existing business owners considering closing their businesses, and existing sentiment survey measures.

Business transformation: measuring variables such as queries about engaging staff, innovation, coaching and mentoring, marketing, advertising, capital investment, and funding.

Business operation: The business of running a business, such as complying with regulations, business entries and exits (including insolvencies), demand, economic performance, levels of debt, and general economic conditions, including disputes.

Our approach is different from other interesting and informative small business surveys that provide useful snapshots since we use measurements beyond customer data, sample populations, and specific questions. We are, therefore, able to capture the views and experiences of the business lifecycle in near real-time.

The Pulse probes factors ranging from people considering starting a business to responses to changing conditions, those who are transforming or growing their business, and those who are considering closing their business and finally doing so.

Debts out of control: Small businesses doing it tough

Unquestionably, conditions are tough right now for many of the 2.5 million Australians driven by the entrepreneurial spirit to pursue a dream to be your own boss, working when and where you choose while pursuing a passion.

The business operating environment has been in decline since the peak COVID era, with rising concerns about regulation, increased costs and slowing demand weighing on profitability. The risk-reward balance is not what it should be for too many small and family businesses.

We’re seeing rising queries from exhausted small business owners looking at their options. These include those who are in financial distress and those who are looking for a dignified dismount while they still have choices.

Small business owners are concerned about the viability of their businesses and whether they can ride out the tough economic climate. The value of debts owed by small businesses increased over the last year, and around half of small business loans are secured by the family home. Higher interest rates have increased the cost of this finance. Credit checks for approving credit (either finance or trade credit) had their largest fall in over a year.

Small businesses are increasingly concerned that other businesses that owe them money are insolvent, with corporate insolvencies at record highs. Unincorporated business failures have also increased, although they remain below pre-pandemic levels.

Payment disputes are often an early warning sign of cash flow issues. They now account for 42 percent of disputes in which we provide one-to-one assistance to small businesses.

The labour market remains tight but has eased slightly over the past year. While this is encouraging for small businesses looking to hire staff, there are fewer smaller employers than there were last year. Queries about recruiting new staff have reached their lowest levels in nine months. Fewer small business owners are enquiring about expanding their businesses as they struggle to stay viable and open.

A bright note is that queries from people considering taking the leap into business have remained relatively high since February, and business formation continues. Similarly, there has been a rise in small business owners interested in growth ambitions and seeking business coaching and mentoring.

However, the operating environment remains challenging. Concerns about regulation continue to remain high, particularly tax and work health and safety. There are also increasing queries about small business’ privacy obligations.

Our Pulse check tells us we need to do more to energise enterprises, and I have outlined 14 steps to boost small and family businesses ). We need more incentives for those starting out, better access to justice when wronged, and more emphasis on encouraging younger Australians to consider business ownership.

It is not enough to rely on the abundant optimism and drive of small and family business owners alone. We need the right incentives and better encouragement to do more than just mitigate the ‘wind in the face’ but to confidently ‘put wind in the sails’ of businesses and to make sure the ‘engine room’ of the economy is firing on all cylinders and is supported by conditions that optimise the prospects for success.

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