New Zealand SMEs confident despite rising costs & soft profits

Small and medium-sized businesses across New Zealand are reporting strong levels of confidence in their own prospects, despite mixed outlooks for the wider economy and persistent cost pressures.

SME confidence

The latest research from Prospa indicates 92% of surveyed SME owners feel either very or somewhat confident about the next year, up from 87% earlier in the year. Confidence in the longer term is also rising, with 91% expressing confidence in their business prospects over five years, compared to 85% previously.

"It's been a tough economy for five years now, and we keep waiting for things to finally improve. But many Kiwi SMEs are sick of hoping and waiting for things to turn around. They know the economic challenges are real, but their optimism hasn't disappeared. Instead, they're more confident than ever in their own ability to tough it out and succeed. They've accepted the new normal and are being pragmatic by focusing on what they can control," said Adrienne Begbie, Managing Director, Prospa NZ.

Profit outlook

Despite the increased confidence, there are signs that market expectations and profit forecasts are softening. While 72% of owners expect their profits to rise or stay steady in the year ahead, 26% now foresee a decline in profits, which is up from 15% at the same time last year. This is reflected in business health perceptions, with 55% describing their business as being in 'good' condition, down from 62% late last year.

Confidence regarding the broader economy, however, remains subdued. Just 45% expect macroeconomic conditions to improve within the next 12 months. The number of owners pessimistic about the economy has increased, with 27% believing conditions will not improve, up from 19% earlier this year.

Rising costs dominate owner concerns, highlighted by 51% as the primary challenge. This is followed by issues related to market demand (36%), the wider economic environment (20%), and staffing (11%). According to one SME owner, "Rising operational costs affecting profit margins in New Zealand, is the biggest challenge facing my business." Staffing and recruitment represent the largest expense category for 17% of SMEs, ahead of taxes and government-related payments at 14%. Utilities and telecommunications have also climbed as a notable concern, being mentioned by 7% compared to just 1% previously.

Adapting strategies

With a muted outlook for the broader economy, many SMEs are shifting their business strategies. Thirty-four percent plan to adjust their pricing, while 31% expect to diversify their offerings. A similar proportion plan to invest in marketing and promotion. Additionally, 28% plan to hire more staff, up from 15% reported in April.

This pragmatic approach extends to cash management. A quarter (26%) now have enough savings to last between four and six months, up from 17%. The share with more than ten months of reserves also increased, but 17% have less than one month's reserves on hand. "Managing cashflow effectively while ensuring timely payment and operational stability remains challenging," one owner said.

Finance trends

Access to external finance is part of this trend, with one in three SMEs planning to seek external funding in the coming year. Trust in non-traditional finance providers has increased, rising to 26% from 17% since April. This shift suggests more businesses are considering a wider array of options to support operational changes.

"We know that Kiwi small businesses are notorious for their DIY spirit, but this is truly that resilience in practice. Owners aren't waiting anymore for the perfect conditions. They're backing their own judgment and finding their own way to keep growing. Businesses have accepted that these are the conditions they must operate in and they're getting on with it," Begbie added.

"The focus now is on staying flexible, regardless of whether interest rates ease the burden or the Government steps in. That's why we're seeing business owners actively investing in things that will keep their business moving, like marketing or growing their team," said Begbie.