Australian businesses will need to find efficiencies and cut operating costs as interest rates rise, amid the growing cost of living, and a price hike for goods and services by business owners may cost them clients and customers.
The Reserve Bank’s decision to lift interest rates by 25 basis points in early May, raising the official cash rate to 0.35 per cent will impact business margins, particularly small to medium businesses with high debt and low capital.
The natural reflex for businesses is to raise prices to even out the balance sheet, which would be fine in a more buoyant economy but the rising fuel prices, and cost of living already has many scrambling to find ways of cutting costs including their current expenditure.
Below are a few tips for businesses to salvage shrinking margins, without imposing a price hike on customers and clients:
- Improve productivity and efficiency: Now is the time to review processes and output and look at ways to improve or streamline your operations, such as automation of processes including business software.
- Strategically cutting costs: Review your current service providers and contracts such as telecommunications and internet providers, commercial property leases and service contracts, and compare the current market. But be mindful not to cut marketing spend or communications capabilities which could cost you business in the long term.
- Revisit your banking and financial products needs: Look beyond your short-term needs and make sure that the interest rate on your business loans is competitive and weigh the benefits of variable and fixed rates.
- Develop a pricing strategy: Rather than a price increase, look at ways you can leverage or bundle your existing goods and services, It could be cheaper for your business to offer a discount on upfront or prompt payments, rather than maintain an overdraft which accrues higher interest rates.
- Consider your supply chain: Overseas markets are volatile at the moment, consider reducing risks by finding a domestic supplier which could also slash the costs of freight and storage.
- Review your workforce: The labour market is competitive, and you want to keep talented staff but consider offering flexible work arrangements, offering nine-day fortnights rather than pay increases, and looking for training and development opportunities, particularly those that are subsidised by government.
It is always healthy for businesses to review their operations and financial position and seek strong advice to ensure that you and your team are making strategic choices that will benefit both the business and the people working in it.
For businesses that have a lot of cash on their books, now is the time to review the interest rate on your savings account and make sure your financial institution is giving you a decent rate of return, it should work both ways.