Agriculture businesses in the Darwin area that spent capital in their first year survived longer

Turnover

Businesses that made capital purchases in their first year of operations lasted on average two more years than those that did not (BLADE).

The cohort of businesses that first generated turnover in or prior to 2001-02 saw a 44% decrease in annual turnover over the next 15 years, and a drop in market share from 100% to 30% (Figure 1). While not as strong, this trend was repeated for cohorts of businesses that started in 2002-03 – 2005-06 and 2006-07 – 2010-11, with a flattening of their total turnover over time (BLADE).

Despite this, the overall agriculture turnover in the Darwin study area (Jobs and Growth case study) showed a steady increase during the 15 year study period. This implies that it was the influx of a constant stream of new businesses rather than the growth of existing businesses that was driving industry development.

 

Figure 1 Turnover over time from different cohorts of businesses in the Darwin study area between
2002-03 and 2015-16 (BLADE)

The lack of growth within each cohort of businesses appears to have been caused by many businesses leaving the industry, or at least ceasing to actively trade. Of 570 active businesses in 2001-02, less than half (265) were still active in 2008-09. In 2005-06 there were 291 active businesses that started within the previous three years and by 2010-11 more than half of these businesses had ceased operations.

Referring to this as the ‘half-life’ and extending to all years of origin within the study period, the half-life of businesses in the Darwin study area (Jobs and Growth case study) between 2001-02 and 2011-12 was between four and seven years. To put it another way, any agricultural business that started operations in the first part of this century was more likely than not to have ceased operations within four to seven years (BLADE).

It is therefore not surprising that the median annual turnover from businesses that started operations in any given year looks something like Figure 2.

 

Figure 2 Turnover over time from different cohorts of businesses in the Darwin study area between
2002-03 and 2015-16 (BLADE)

But what about the businesses that did not cease operations? We know that a large number of businesses did not survive more than a few years, but were the remaining businesses also declining, just at a slower rate?

Again, the median annual turnover of businesses that started operations in any given year tells a story, but this time it is a different one (Figure 3). Looking at the median turnover from businesses that are still active, we see a very different trend:

 

Figure 3 Median annual turnover from active businesses in the Darwin study area that started operations in 2003-04 (BLADE)

So the issue appears to be not a lack of growth among long-life businesses, but rather a high attrition rate. Another way to look at this is by the proportion of businesses that were still in operation at the end of the study period. During the 14 years from 2002-03 to 2014-15 there were 819 new businesses. Just 274, or 33% of those businesses were still generating turnover in 2015-16 (BLADE).

Can predictions be made about which businesses will last? Capital expenditure turns out to be a useful indicator.

Capital expenditure

Businesses that made capital purchases in their first year of operations lasted two more years than those that did not.

Comparing the 274 businesses that were still operating in 2015-16 with the 545 that were not the study found that, on average, successful businesses spent around $70 000 per year on capital expenditure, compared to under $33 000 among unsuccessful businesses (Figure 4).

Looking at each year in isolation, the median annual capital expenditure among businesses still operating in 2015-16 was between $13 000 and $50 000, while for businesses that ceased operations prior to 2015-16 it was between $0 and $12 000 (BLADE).

 

Figure 4 Median capital expenditure per year in the Darwin study area that started operations in 2003-04 (BLADE)

Many businesses did not make any capital purchases at all. There is a strong correlation between the lifespan of a business and whether or not it spent capital in its first year. On average, businesses that made capital purchases in their first year of operations lasted two more years than those that did not (Figure 5). Between 2002-03 and 2009-10 this difference rises to 3.5 years (BLADE).

Capital investment appears to be a good indicator of future success. It appears that successful businesses started life with sufficient investment behind them that they were able to spend money on capital purchases in their early years. Businesses that began without sufficient backing were more likely to fail.

 

Figure 5 Median lifespan of businesses in the Darwin study area based on whether they made capital purchases in their first year (BLADE)

There are three messages from this analysis:

  1. In order for the agriculture industry in the region to continue to expand and develop, a constant supply of new businesses entering the industry is required
  2. The development of the industry can be further bolstered by better support to those businesses at risk of failure
  3. There is a clear correlation between capital expenditure and business longevity, suggesting that new businesses are much more likely to succeed if they have sufficient capital to allow them to make critical capital purchases in their first year and continue to do so in the following years.

Overall this is a positive message as it implies that there is a continual influx of new agricultural businesses that are succeeding. However, it also signals a warning: in order to maintain or increase the current levels of production new entrants must continue to emerge and succeed. Better support for these new entrants is likely to lead to increased investment and agricultural production in the region.

The region cannot afford to be complacent: without a constant flow of new agricultural businesses into the Darwin study area (Jobs and Growth case study) the industry is at risk of stagnating or even declining. But these findings also reveal a great opportunity for the region. If the attrition rate can be lowered there is every chance the industry can take off. Consistent capital purchases appear to be one way to increase the lifespan of a business, and so with an increase in investment from private and public sectors the industry may fulfil its potential.

Northern Territory farmers advocates for businesses to “start small and grow big”. While this has proven to be valuable advice, maybe it is incomplete. Perhaps the best advice for new agricultural businesses in the Darwin study area (Jobs and Growth case study) is “start small but strong, and grow big”.

Themes
Land
Regions
Northern Territory
Published date
24 October 2019
Updated date
24 October 2019