We Bring a Detailed Overview of the Real Sector’s Business in 2023.

According to the available current aggregate data from the InfoBiz portal, 158.2 thousand business entities (of which 150.7 thousand are companies, five thousand ‘large crafts’, 2.7 thousand institutions and cooperatives) have publicly disclosed their financial reports for 2023. These are taxpayers and accounting record keepers under the double-entry bookkeeping principle, which we colloquially refer to as the ‘real sector’ (and will continue to do so in this article).

This is an increase of 2.7 percent compared to 154.1 thousand for 2022. In 2023, they employed 1.03 million workers according to hours worked, three percent more than the million in 2022. In 2023, the standard ratio of those who operated with profit and loss significantly improved to 67 – 33 percent (except for 2020, the year of the corona crisis, when that ratio was lower at 60 – 40 percent), and amounted to 70 – 30 percent.

The share of investors and exporters in the total number, as one of the indicators of entrepreneurial agility and competitiveness in the global market (unfortunately) has not significantly changed in the last five years. The share of the number of investors for 2023 was 9.1 percent and slightly decreased from 9.4 percent for 2022 (2019-2021 9.3 percent). The share of the number of exporters for 2023 was 16.1 percent, almost identical to 16 percent for 2022 (2019-2021 15 percent). The only significant increase (also unfortunately) was in the number of importers, from 24.9 thousand for 2022 (share 16.1 percent), by 1.6 percentage points, to 28.0 thousand for 2023 (share 17.7 percent).

In 2023, the real sector collectively achieved 161.4 billion euros in total revenue, which is 8.1 percent more than in 2022, while in 2022 compared to 2021, there was a significantly higher growth of 25.8 percent. Over five years, from 2019 to 2023, total revenues grew on average by 11.7 percent, 0.6 percentage points higher than the average annual growth of total expenses (11.1 percent). Observed only for 2023 compared to 2022, a positive difference of 1.1 percentage points was also achieved, with revenues growing by 8.1 percent and expenses by seven percent.

Growth of Profit Margins

Such positive changes over the five-year period, as well as the positive deviation in 2023/2022, led to an increase in profit margins at all levels (EBITDA margin as a quick indicator of liquidity, EBIT margin as an indicator of the efficiency of core activities, gross margin as an indicator of the efficiency of overall business, and net margin as the ‘bottom line’ after calculating income tax), the amount of which is influenced by different tax rates (18 and 10 percent), as well as tax incentives and increases in the tax base for non-deductible expenses.

For the deviation of the net result (profit – loss) for 2023 compared to 2022, it should be taken into account that in 2022 there was also an obligation for additional income tax, so the calculated 1.6 billion euros compared to 8.4 billion gross results amounted to 19.7 percent effective income tax rate. In 2023, the calculated income tax of 1.9 billion euros compared to 10.6 billion gross results amounts to 17.7 percent.

• Overview of revenues (billion EUR), net results, net and EBITDA margins in the period 2019 – 2023, collectively for the real sector of Croatia

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To measure the competitiveness and excellence of individual economies, important indicators are the value and shares of revenues from sales abroad, as well as investments in fixed assets.

Unfortunately, despite the growth of total revenues, export revenues in 2023 amounting to 33.6 billion euros fell by 4.1 percent compared to 35 billion euros for 2022. Thus, the share of export revenues in total sales, which reached 23.8 percent for 2022 (2021 21.6 percent, 2020 and 2019 19.2 percent), fell to 21 percent in 2023, a decrease of 2.8 percentage points compared to 2022, and even below the value for 2021 (by 0.6 percentage points).

In contrast, largely influenced by the possibility of using non-repayable funds, the value of investments in fixed assets, which averaged just over 10 billion euros annually from 2019 to 2022, increased to 13.7 billion euros in 2023, a 27.8 percent increase compared to 10.7 billion in 2022.

• Overview of the value of investments in fixed assets and revenues from subsidies in the period 2019 – 2023, in billions of EUR

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In the structure of 13.68 billion investments in 2023, investments in buildings dominate (5.95 billion euros) with a share of 43.5 percent (2022 4.46, share 41.6 percent) and in machinery and equipment 4.23 billion euros with a share of 30.9 percent (2022 3.58, 33.5 percent). Investments in transport vehicles amounting to 1.25 billion euros maintained a share of 11.1 percent (2022 1.25, 11.7 percent). The largest growth, which is also the greatest consequence of the possibility of using subsidies, was achieved in investments in intangible assets, totaling 1.98 billion euros, a share of 14.5 percent), 40.3 percent more than 1.41 for 2022 (share 13.2 percent).

Financial results and other economic effects in the future medium-term period will show how quality and justified these investments were, that they were not only motivated by the availability of funds and realized through nice writing, that EU funds were not treated as buyers, and that attention was paid to the realistically achievable return on investment.

Debt Slightly Increased

Collectively observed, liquidity has improved (current liquidity ratio for 2023 1.33, for 2022 1.29). The value of the quick liquidity ratio (which measures the relationship of current assets without inventory and current liabilities) in 2023 reached a value of 1.0, indicating that dependence on inventory has decreased, that they can be converted into cash with less nervousness and pressure from which excessively high price discounts and discounts for faster payments usually arise. This is also confirmed by the cash gap, shortened by 2 days in 2023 compared to 2022, from 61 to 59, precisely due to the shortening of the days of inventory binding by 2 days (2022 50, 2023 48).

Total financial debt (long-term and short-term liabilities) to banks and other financial institutions amounted to 29.73 billion euros as of December 31, 2023, slightly increased (by 3.4 percent) compared to 28.77 (as of December 31, 2022). Since the cash position as of December 31, 2023 (16.82) did not significantly change compared to 16.14 as of December 31, 2022, net financial debt (NFD = financial debt – cash) also slightly increased, from 16.14 to 16.82 million euros.

What has not proportionally slightly increased is the interest expense. This position of financial expense increased from 1.10 billion for 2022, by 45.9 percent, to 1.61 billion euros. This is entirely in line with the financial performance results of banks reported for 2023, but it is not in line and harms the concept of excellence and sustainability of the ecosystem at all levels (economy, activities, companies), when an economically reasonable balance is sought to satisfy the interests and utilize the potential of all stakeholders in the ecosystem (stakeholder concept).

Unfortunately, we are far from having the behavior (reactivity and a backward look when approving financing, using opportunities for short-term profits, and a lack of responsibility for long-term sustainable business), business models, and competencies of the financial sector aligned with the needs of entrepreneurship, which represents the most agile stakeholder with one of the key impacts on the development and nurturing of the excellence of the community and the sustainability of its economy as a whole.

Be that as it may, observing the trends and values of the relationships of the aggregate values of net financial debt and EBITDA (2023 0.7), and the relationship of own and external financing (2023 40 – 60 percent), if the ‘real sector’ were observed as one large company – conglomerate, it would be easy to conclude that it is a low level of indebtedness, and the possibility that well ‘targeted’ investments in the development of new products and services, new business models, the development of new competencies, automation and robotization, conquering new markets, new fixed assets, can be financed under reasonable commercial conditions and procedures (interest rates, deadlines, grace periods, simplicity of procedures and bureaucracy…).

Undoubtedly, the conditions in the labor market (shortage and fluctuation of the workforce) and inflationary pressure, as well as the development of the competencies of founders and managers that have enabled them to better understand and evaluate the position and value of human capital, have strongly influenced the growth of personnel costs, i.e., the growth of salaries and earnings of employees in the past medium-term period.

Rapid Growth of Salaries

In relation to revenues that have averaged grown by 11.7 percent over the five years of observation and net results (29.4 percent), the average monthly net salary of employees (net salaries + allowances and support) has grown by 8.6 percent. In 2023, compared to 2022, the average monthly net salary grew more (8.6 percent) than revenues (8.1 percent). Given the tax policies that defined non-taxable allowances and support, their growth is significantly higher than the growth of net salaries. Over five years, average monthly allowances and support have averaged grown by 16.3 percent, and net salaries by 7.4 percent, and in 2023 compared to 2022, 15.2 percent (average monthly net salary 10.7 percent).

• Overview of average monthly net salaries, allowances and support, and total average net earnings for the period 2019 – 2023.

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When it comes to analyzing the aggregate values of key financial positions (revenues, expenses, results, workers, investments, exports, and imports) and the indicators derived from them, it is necessary to be extremely cautious and treat them as indicators of very limited value. The reason for this is that they aggregate the operations of entrepreneurs of different characteristics, differing at least by two key criteria: size and activity.

Therefore, in the next two tables, we will present comparative data for 2023 for:

• Five size categories (large – medium – small – micro with at least 1 employee – micro without employees)

• Seven sectors with the largest share of revenues in the aggregate value of revenues for 2023.

• Overview of key financial positions (billion EUR) and derived indicators for 5 categories of entrepreneurs by size for 2023.

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• Overview of key financial positions (billion EUR) and derived indicators for the 6 largest economic sectors by revenues for 2023.

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When One Sees the Light, Another Falls into Darkness

When analyzing the aggregate data for 2023, it can be confirmed what has already been hinted at in some previous analyses (analyses of ‘heavyweights’ from the ZSE, analysis of large retail chains, analysis of large construction activities, …), that 2023 was a good business year for a significant number of entrepreneurs, considering quite unpleasant circumstances from the environment (uncertainty, armed conflicts, stagnation of partner economies, increasing problems with the workforce).

The drop in raw material and material prices compared to prices from 2022 and the inflationary uproar gave them the opportunity to achieve better financial effects in business through the output prices of their goods and services, and their adjustments, despite increased investments in employee satisfaction, responsibility, and motivation (read: salaries and other forms of earnings), and rising financing costs, and to maintain liquidity and indebtedness at appropriate levels. Of course, this previously mentioned is quite generalized, and negative deviations are observed in some activities, especially in the micro-entrepreneurship segment.

And how this relatively good entrepreneurial year reflects on citizens – consumers, that would be another story. Most in the spirit of the slightly adapted old saying, “when one person sees the light, another falls into darkness.”