Business urged to prepare for increasing cost pressures in 2011

16 February 2011: Businesses are leaving themselves open to potential long-term pain from increasing cost pressures in 2011, according to the Commonwealth Bank.

According to Symon Brewis-Weston, the Bank’s Executive General Manager of Corporate & Financial Services, a continued rise in both fuel and energy prices will be two primary causes of concern that will place added pressure on businesses in 2011.

Other factors called out as having real potential to dent the bottom line include rising utility costs, wages growth and the predicted decline in the Australian Dollar.

“The simple fact is that there are a range of risks that businesses are facing in 2011, some of which we currently have visibility on and others that are unexpected, such as the climatic events that have already hit firms over the beginning of this year,” said Mr Brewis-Weston.

“What that means is that companies have the favoured position of being able to proactively plan for those identified risks, weighing up the potential costs and putting in place the right strategies to minimise those risks now before it’s too late.”

With rising business costs set to play such a prominent role in 2011 and likely to be exacerbated by a fall in the Australian dollar, Mr Brewis-Weston points towards the need to employ forward-thinking strategies to help prepare against the associated impact on firms’ cost bases.

“Businesses will remain cautious of a rise in interest rates and together with anticipated fluctuations in fuel pricing over 2011, now is the time to be thinking about hedging strategies so that you can have better visibility of cash flow and overheads,” said Mr Brewis-Weston.

“Many firms are already holding back on investment which means that they’re also missing out on new opportunities. Employing hedging strategies can effectively free up additional capital for your business which can be used on implementing growth strategies, investing in new equipment or on filling new orders.”

Thanks to the strength of the Australian dollar, which continues to trade around parity with the US dollar, many companies have been enjoying lower costs of imported goods. Despite its strength, Mr Brewis-Weston warns that a declining Australian dollar in 2011 will increase costs of imports and raise the prices for firms reliant on imported inputs.

This also extends to fuel prices, where the strong dollar has cushioned the impact of higher prices on the economy. With the currency expected to ease from current record highs, oil prices and petrol prices will really begin to bite through 2011.

Mr Brewis-Weston also sees wages growth as another area to factor in to planning, which is expected to pick up over the next 12-18 months as the labour market tightens, having the potential to rise to the 4% range on average.

Transport costs are also under pressure from a significant increase in transport sector wages, something that may be intensified further on the back of calls for greater employer superannuation contributions.

Despite these adverse conditions, businesses shouldn’t lose sight of the prospective upside arriving from these economic conditions.

“Although there are some risks ahead for business, I think that it’s important to focus on the fact that the news is not all bad,” said Mr Brewis-Weston.

“If companies are proactive now, the chances are that the exposure to the risks presented by the market can be reduced and better still, by employing the right strategies, firms stand to actually derive some true benefits.”

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