Confidence levels have returned to small to medium-sized enterprises after the destabilising floods in December and January, according to National Australia Bank’s (ASX: NAB) SME Quarterly Survey for the March quarter.

SMEs reported that borrowing costs, staffing, global economic uncertainty and cash flow were all less significant as constraints on long-term decision making in the March quarter, while demand was the only constraint to have risen in significance.

However, SME business conditions – including trading, profitability and employment – softened again in the quarter to reach their lowest level since June 2009.

Daryl Johnson, Executive General Manager, NAB Business Australia, said that there are signs of optimism but it’s still a challenging time for SMEs.

“During the March quarter, SME confidence levels were up from five to eight (index) points, with all SME industries returning to positive territory,” Mr Johnson said.

“This suggests they are more optimistic about future conditions and are looking forward to the post-flood recovery period.

“Despite this optimism, SME business conditions have remained on a gradual decline from the post-GFC peak in December 2009, pushed down again by the recent floods that are estimated to have reduced national business revenues by 5 per cent in January,” he said.

Confidence levels were positive across each state, with Western Australia (13) and Victoria (10) recording the highest levels for the second consecutive quarter.

Alternatively, business conditions deteriorated across all major states, except South Australia (1), with Queensland recording the largest deterioration (zero to -20) and Victoria the strongest (8).

Mr Johnson also said that an increased in consumer demand is critical to improving business output and profitability in the next 12 months.

“Fifty eight per cent of SMEs report that sales and orders are a more constraining factor on output than finding suitable labour (45 per cent),” Mr Johnson said.

“Regarding profitability, 40 per cent of SMEs surveyed believe demand remains the most significant profitability constraint in the next 12 months, while availability of suitable labour (13), wage costs (11) and interest rates (8) were less significant,” he said.

The survey also showed that by industry, conditions were strongest in business services and finance, while conditions were weakest in construction and retail. Cash flows are now by far the strongest in accommodation and are weakest in construction, retail and property.

“What we are seeing is a retail hangover from Christmas and the floods,” Mr Johnson said.

“Demand disruptions and falling orders have led to businesses reducing capital expenditure and running down stock levels that adversely affect cash flow and profitability.”