Lessons for SMEs from BHP Billiton’s $17.8 billion profit

Australian business owners of all shapes and sizes are looking on with envy today at the incredible $17.8 billion profit announced by BHP Billiton.

Australian business owners of all shapes and sizes are looking on with envy today at the incredible $17.8 billion profit announced by BHP Billiton.

Not only is it a record profit result for an Australian company, it’s bigger than the profits posted by our big four banks.

But what can small and medium sized companies learn from the BHP Billiton result – other than the idea that digging minerals out of the ground and exporting them to China is a really, really good way to make money?

Here are some of the lessons the Big Australian can give to the smaller ones:

• Investment in the future pays off

BHP Billiton may be riding a once-in-a-lifetime commodities boom, but it is only because it spent billions on exploration, development and takeovers (including the $9.2 billion acquisition of WMC Resources in 2005) that it can exploit this situation. It’s also worth noting that BHP is ramping up its capital expenditure and exploration programs, despite speculation that the commodities boom is running out of steam. It wants to be ahead of the next cycle.

• Cash is king

BHP Billiton spent $US7.6 billion on capital expenditure and $US1.3 billion on exploration last year, leaving it with cashflow of $US9.1 billion. The company spent $US3.25 billion of this free cashflow on dividends – it could have spent much more and indeed many investors have been critical of the company for not doing so. But BHP knows that hanging on to to $US5.8 billion in cash gives it flexibility – to expand, to take advantage of opportunities that might come up as the resources sector slows and to insulate it from rising credit costs.

• Timing is everything

There’s nothing like a bit of luck, even when you are as big as BHP Billiton. For some time the company’s petroleum division has been underperforming, to the point where executives at BHP’s takeover target Rio Tinto were openly critical of BHP’s involvement in petroleum. But a spike in the oil price in recent months made the petroleum division the second largest contributor to the record profit. Lucky? Probably. But BHP’s persistence with petroleum in the face of criticism has also been rewarded.

• Diversification helps smooth the bumps

A resources company like BHP Billiton is always going to be prisoner to the commodity cycle, but the breadth of the company’s product range – from iron ore to diamonds and coal to stainless steel to petroleum – will help insulate its profits from any downturn. While it is difficult for smaller companies to sustain multiple divisions, developing separate revenue streams should be examined.

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