Top tips for small businesses to handle the sharp inflation

Article source: SmartCompany, written by David Adams.

The annual inflation rate is now 6.1%, as the cost of everyday essentials hits businesses and households.

Inflation skyrocketed at an annual rate of 6.1% in the June quarter, new data from the Australian Bureau of Statistics (ABS) has revealed, confirming a drastic increase in the cost of everyday essentials.

It is the highest annual uptick since the GST was introduced in July 2000.

In its new analysis, released Wednesday morning, the ABS confirmed the Consumer Price Index (CPI) not only surged over the year, but by 1.8% from the March quarter — where year-on-year inflation hit a bruising 5.1%.

Underlying inflation — otherwise known as trimmed mean inflation, which excludes the most volatile spending segments — also grew by 4.9%.

Cost increases were driven by housing, rising 9% over the year, transportation costs including petrol, climbing 13.1% annually, and furnishings, household equipment and services, with annual cost growth of 6.3%.

Those increases were driven by high demand and supply-side shortages, which have suppressed the availability of key building materials, fuel, and household goods through 2022.

Lingering supply chain disruptions caused by the COVID-19 pandemic collided with flood disruptions to slow the movement of essential goods and services over the survey period.

High fuel prices contributed to the rising cost of heavy goods like furniture.

At the same time, labour shortages — a hangover from Australia’s closed-border policies earlier in the pandemic — are driving up the cost of some services.

Hospitality venues counting the cost of rising ingredient prices now have hard data to point to, with the cost of vegetables alone surging 7.3% in the year, in large part due to the impact of floods on farms across Australia’s east coast.

The figures fall slightly below broad market expectations, which suggested June’s data would show an even greater uptick of inflationary pressures.

Earlier on Wednesday, Westpac analysts predicted an annual CPI uptick of 6.1% and 1.7% over the quarter, a somewhat lower estimate than broader market expectations of a 6.3% annual lift and a 1.9% quarterly rise.

ANZ found its estimates slightly too aggressive, having predicted year-on-year inflation growth would hit 6.6%, and 2.3% quarter-on-quarter.

Tips for small business to help handle the sharpest inflation growth.

Focus on high-margin goods and services

Businesses should turn their focus to high-margin goods and services, Gavan Ord, Senior manager of business and investment policy at CPA Australia says.

“To improve your cash position, focus your promotional activity on high turnover items that have a good profit margin. Reduce or remove products or services that have low turnover and low profit margin.”

Such practices can be crucial in the hard-hit hospitality and service industries, Accountant Lisa Greig, founder of tax and business advice service Perigee Advisers added.

“My clients in the hospitality area, instead of offering 10 or 20 things on the menu, they’re cutting down to five,” she said.

“So they’re just trying to eliminate the waste and the additional costs.”

And as much as possible, firms should avoid shouldering the cost of rising input costs themselves, while keeping an eye on their bare minimum break-even point.

“Instead, look to pass these along to customers or add value in other ways,” Ord said.

Streamline invoicing and credit processes

To keep cashflow as stable as possible, small businesses should also keep a close eye on their invoicing habits.

“We’ve all found through the downturn, and now with inflation, that our debtor days are going out,” Greig said.

“Make sure you’re on top of debt collection,” Ord added.

“Credit checks are vital, and credit limits must be set, regularly reviewed and communicated to your employees. Send invoices as soon as work is completed, and document payment terms clearly on all invoices.”

Keep an eye on interest rates

Beyond the direct impacts of rising input costs, small businesses should also keep an eye on interest rates.

Earlier this year, Commonwealth Bank said financing for equipment and machinery was up 17% this financial year compared to 2021-2022, boosted by sweeteners like the instant asset write-off and the new “bonus” tax deduction on tech and digital upgrades.

Grant Cairns, the bank’s executive general manager for business lending, said such lending activity was likely to continue.

Raising the cash rate target would see lenders hike their own interest rates, effectively making it more expensive for business to borrow funds to expand or upgrade their operations.

The same goes for variable rate loans on commercial properties and business premises.

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