If Your Business Relies Heavily On Government Spending: What Goes Up Can Crash Down

By Kirk Cheesman

The UK's Daily Express recently reported that 17,000 firms in the country are facing collapse due to a reduction in government spending.

Mainly affected would be small to medium size firms (SMEs) operating primarily in construction, recruitment and IT, which rely heavily on government contracts.

In light of this news and from the perspective of ICBA Australia and New Zealand, the Australian Government stimulus package kept many SMEs afloat in 2009 and 2010, and also delivered welcome sales for suppliers. Yet, the question is: will Australian businesses face similar concerns to their UK counterparts in the near future? Will other SMEs from other similar economies worldwide?

Given that marginal governments avoid tax increases like the plague, spending cuts will be high on the government agenda. Suppliers in the building sector, who have heavily relied on government spending in areas such as education and infrastructure, will need to quickly target the private sector for work when public spending drops.

The recent example of the Australian government’s sponsorship of the house insulation program demonstrates how an industry can quickly rise to a high and then crash dramatically, based on a change in the government's agenda.

Perhaps every ICBA Credit Managers should be asking new or existing clients: “What percentage of your sales depends on government spending?” Definitely SMEs should be asking this question of themselves.

(Kirk Cheesman is Managing Director of ICBA Australia and New Zealand, National Credit Insurance (Brokers) Pty Ltd.)