Forgetting that it was a public holiday today, earlier this morning I read the Australian financial press. I read the piece by Michael West on page 41 which largely dealt with the woes of Commander. At the conclusion of the article he sums up Commander's situation as:
1) Commander owes it's banks $A360 million
2) Net Assets are $A20 million
3) For the latest half year it had lost $A100 million in cash flow
4) It has disclosed, a previously undisclosed, off balance sheet debt of a further $A75 million
West's observation is that Commander's banks are "in denial" and should have pulled the plug long ago. How a once enormously profitable 'division' of Telstra could be sold off to private investors and, within ten years, be mismanaged into this sorry story is very difficult to imagine. It further illustrates the extreme dangers of borrowing when rates rise and banks find their own sources of funds shrinking and becoming much more expensive.
No matter what form of denial anyone might choose to employ the current facts appear to be that 'retail spending' is shrinking and business spending is 'on hold' for many industries and in many States (even the ACT economy will decline rapidly now their own version of the mining boom (the ACT building boom) is finally at an end. Earlier this year we decided to put our own, modest, capital expenditures on hold - we withdrew our offer to buy 450 square meters of floor space in the Sydney CBD and shortly after that indicated to the DSLAM provider with whom we had been 'negotiating' for a long time that we wouldn't be proceeding with the purchase of around $A5 million of their products.
Since then we have carefully evaluated the effects on our small business of the deluge of bad financial news delivered hourly both in Australia and around the Western world. From what I understand of what I’ve read both the US and UK banking systems are on life support by way of their central banks continually feeding them money (by buying up their suspect assets, to allow them to keep functioning. Something similar appeared to happen in Australia over the past ten days.
From what I can see so far there has been no negative effect on Exetel’s business (not in any one of the ten service types we provide) and in fact there has been a marked upturn in most of ur service types – particularly over the past few weeks. It now seems that the RBA will increase interest rates again in late May and that may be the ‘straw that breaks the camel’s back’ and we will then see a downturn in our business. We had considered taking a deeply conservative ‘view’ of the coming 18 months in terms of planning and operation based on the many negatives being reported.
I still have very little doubt that (as in the case of Commander) that will be true and many businesses that have any form of serious exposure to debt will either fail or find the coming months very difficult. However, subject to what may transpire if there is a further rate rise in May it seems to me that, for whatever reason(s) our small business is positioned to avoid the worst of any ‘fall out’ from even tougher economic times and maybe, as the text books suggest, we should take a counter-cyclical view of our market places and aim to take advantage of the, forced or self determined, more conservative actions of our competitors.
Perhaps being the lowest priced supplier in tough economic times is the ‘magic bullet’ when money becomes less available?
In any event, partly because of circumstances ‘wished’ on us by things like a feeling that Optus may withdraw their ADSL1 wholesale services and partly because we do have a need to increase our business in some areas in which we operate we have already committed to activating more PoPs and therefore incurring significant back haul costs and we have already started the $US150,000 investment in Sri Lanka. Seeing the continually rising number of ‘churns’ to Exetel from other ISPs has encouraged us to make almost all of our ADSL1 and ADSL2 plans even more attractive in terms of download per customer dollar spent as well as adding a slew of new add on services for most of our ADSL and Wireless offerings.
We will also actually spend some small amounts of money over the next three months on business product/service advertising for the first time!! All of these activities, individually, are quite small and low cost but the sum, looking forward, becomes considerable over the next year. Of course, unlike large borrowings on capital equipment or real estate, these expenditures can be more easily reduced if things turn out differently (negatively) with the exception of the new back hauls.
I hope these don’t turn out to be “very brave decisions.”
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