Opinion piece by the Ombudsman Bruce Billson.

Originally published in the Canberra Times.

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.

Whether we realise it or not, small businesses are a big part of our daily lives from the local café to the tradie or any one of the many personal services providers who improve our lives.

But it's a significant responsibility running your own business and the unseen 'business of running the business' can be physically, mentally and financially exhausting.

That's why I'm so pleased 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".

The Pulse is an innovate 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 the business environment remains well below the long-term average - about 25 per cent down. Put another way, if you believe, as I do, small and family businesses are the "engine room of the economy", we have lost a cylinder in a four-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 an 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.

For small and family businesses, higher interest rates not only impact their costs of financing but have profound implications for customers in terms of their 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 line with OECD best practice. It brings together a range of data sources that can provide early indicators of changes in the lived experience of small business and the motivations that drive them and 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 eco-system 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 business 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 to 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 life-cycle, and in near-real time.

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

Small businesses are increasingly concerned 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. These now account for 42 per cent of disputes where 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 last year. Queries about recruiting new staff have reached their lowest levels in nine months.

A bright note is 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 enterprise. 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.