Business cashflow is improving on disciplined cost control

Australian businesses managed to improve their cashflow in the September quarter, responding to the slowdown in consumer spending by better controlling their costs. 

The Westpac business cashflow gauge improved by 1.2 per cent over the period to be 1.5 per cent higher in annual terms. 

The latest Quarterly Business Snapshot, which draws on Westpac data from millions of daily transactions, shows that businesses are not standing still, they’re reducing costs including by renegotiating better deals with suppliers, as well as updating their internal processes and investing in new technologies to become more efficient.
 

Alongside the focus on costs, the report also showed that businesses are positioning themselves for growth once the economy picks up. Credit and investment continued to grow strongly over the quarter, with equipment financing rising at more than twice the rate of working capital. 

Businesses are increasingly looking to invest in new technology, including artificial intelligence, to boost their productivity. That’s consistent with recent government data which showed that investment in intangibles, such as software and R&D, has outstripped investment in new commercial buildings, like retail, office and industrial floor space, for the first time ever.

At the same time, businesses are saving for a rainy day, with a significant share of the cashflow increase in the September quarter banked as deposits. Business deposits are growing strongly, with deposit per business close to a record high.  
 

That liquidity boost is supporting balance sheets: the Westpac business coverage gauge – which measures a business’s stock of cash relative to its financial liabilities - is still more than 25 per cent above pre-pandemic levels.

Strong financial buffers have been a feature of the snapshot for several quarters and help to set Australian businesses apart in international comparisons.

The median public listed company in Australia has a higher share of assets held in cash and lower leverage than companies of an equivalent size in many other advanced economies, RBA Assistant Governor Christopher Kent noted in a recent speech. Westpac business data shows that sound and liquid balance sheets extend to private businesses as well. 

“All else equal, this will reduce the vulnerability of Australian companies to a rise in interest rates,” Kent said. In addition, it also makes them less likely to cut back on investment if lenders become less willing to extend credit in response to higher rates, Kent added.

Mixed picture

Beyond the headline cashflow improvement, the snapshot showed a continuing divergence in conditions and economic performance across business sizes, states, and industries. 

For example, companies in the mining-focused states of Queensland and Western Australia are generally doing better than those in the other states, consistent with some of our recent research. 

We’re also seeing businesses that provide essential services to the growing population - such as education, property services and health care - perform better than those in sectors which are more exposed to the consumer-led slowdown.  

Mid- to larger-size commercial businesses are also outperforming, with the Westpac business cash flow gauge for commercial entities showing its biggest increase in almost two years.

Smaller businesses are finding it harder to pass on high costs to consumers and are seeing their cashflow deteriorate and become more volatile. A small pocket of smaller businesses are experiencing cashflow difficulties, but have been able to draw down on their buffers or lines of credit to support operations.

Customer micro-level data offered little evidence that these divergences are narrowing. More likely than not, we'll need to see a broad-based pickup in spending before that happens. 

The good news is we expect spending to lift as we head into 2025 on the back of the stage 3 tax cuts, cooling inflation and eventually lower interest rates.

The increased focus on cost efficiencies and investment means that businesses are well-placed to thrive once spending lifts and economic activity picks up.

To read the full report, visit WestpacIQ.