How could rising rates and inflation affect your business?
Rising prices and interest rates don’t just mean higher borrowing costs. They can affect almost every aspect of your business, including:
Sales. While consumer spending has been strong, higher interest rates have the potential to hit household and business budgets, reducing the amount your customers might spend. Home buyers are likely to be particularly affected, with the average mortgage reaching a record high in January 2022, before dipping slightly to $599,9994.
Expenses. Rising inflation is likely to mean higher costs for stock and raw materials, potentially putting your margins under pressure. Utility costs have also been rising, with the war in Ukraine causing market instability and pushing up energy prices worldwide.
Wages. With unemployment low and inflation rising, some businesses may be under pressure to increase wages to attract and keep the staff they need. Gareth Aird, CommBank’s Head of Australian Economics, writes that wage growth is rising and some people are receiving large pay increases, but that broad-based wage pressures have yet to emerge5.
The key take-out? Keep watching the numbers in your business, including monthly sales revenue, supplier costs, salaries and margins, and be prepared to take action if things change.
How can you prepare?
1. Take a fresh look at expenses
It’s a good time to review your business expenses and look for opportunities to save, especially on the fixed overheads your business pays every month. Start by reviewing your profit and loss statement to identify the areas in which you are spending the most, then work your way down the list from the highest costs to the smallest. Here are some of the ways you may be able to save:
- Check you’re getting the best deal on basics such as your phone and internet, energy and insurance. CommBank has partner offers with providers such as Amber for electricity, and More for internet and phone. Switching providers can be an easy way to save money.
- If you’re renting a premises, use the next lease negotiation to ask for a rent discount or a bonus period. Alternatively, if you’re one of the many businesses whose staff are now working partly from home, consider whether you can move to a smaller office with shared desk space, or sublet space to another business.
- Look for opportunities to outsource activities that can be done at lower cost by outside providers so your staff can focus on your core business.
2. Review your pricing and margins
Increasing your prices is the quickest and easiest way to improve your margins and profitability, with every extra dollar going straight to your bottom line. Your customers may be more willing to accept price adjustments with costs rising across the economy than when inflation was low. Here’s how:
- Calculate the gross profit margin for each of your products or services.
- Consider how you can increase the profitability of low-margin activities or focus exclusively on higher-margin products and services.
- Consider whether you can increase prices for particular products, services or customers, or create higher-priced variations of your existing range.
- If your costs are increasing, ensure your prices rise proportionally so you can maintain or improve margins.
3. Create a working capital buffer
Having extra working capital on tap is a great way to protect your business from unexpected expenses and cost increases, so you can continue to pay the bills while you adjust. Here are some options to consider:
- If you have a variable rate BetterBusiness Loan you can use any spare cash to make extra repayments on your loan, reducing your interest costs, then redraw funds when you need them.
- A Business Overdraft can help you access funds instantly when you need them, then repay them at your own pace, while only paying interest on the amount you use.
- Stream Working Capital can help you unlock the value of unpaid invoices by borrowing against them, then repaying the funds when you get paid.
4. Get a business health check
For expert advice tailored to your unique business situation, contact your local Business Banking Specialist for a business financial health check. It’s quick, confidential and free.