The Council of Small Business Associations is sounding the alarm: inflation is squeezing business margins. With a higher than anticipated rise from 6.9% to 7.3% (ING Think) and with the Reserve Bank of Australia (RBA) set to meet regarding raising the cash rate again in February it’s no wonder decision makers are taking a cautious approach in 2023. The cash rate is currently set at 3.1%, the highest it has been in the past decade.
The problem with inflation for small businesses is that these kinds of businesses often operate on slimmer margins than larger companies. They don’t have the same resources to weather rising costs, which means they’re more likely to pass these costs onto their customers. This can make it tough for small businesses to keep and attract customers, and ultimately to compete with bigger businesses.
Potential Effects of Inflation Small Businesses
- Reduced profitability as the cost of goods and services increases
- Decreased demand as consumers have less disposable income
- Increased competition among businesses
- Volatility in currency fluctuations for businesses operating internationally
- Difficulty in budgeting and forecasting due to uncertain prices and costs
- Possible layoffs, hiring freezes to cut costs
Another way inflation can hit small businesses hard is by making it more expensive or difficult for them to borrow money. As interest rates go up, so does the cost of borrowing. This makes it difficult for small businesses to invest in new equipment, hire new employees, and scale operations as they may originally had planned. The Reserve Bank of Australia has reported a sharp increase in outstanding lending while businesses report difficulties in accessing finance going into the new year. This is fairly typical in times of inflation but it can be crippling to SME’s and Entrepreneurs.
Strategies to Ease the Impact of Inflation on a Small Business
- One of the most important things you can do is to work closely with your accountant. Small business accountants can help you understand your financial situation and come up with strategies to cut costs and increase revenue. They can also help you navigate the tax implications of inflation and find deductions to offset some of the increased costs as well as advising you on any tax benefits the company may be eligible to enjoy.
- Increase prices: By implementing a price increase on a one-off or regular basis, such as annually. However, it’s important to be mindful of the market and competition while doing so, as raising prices too high could lead to a loss of customers.
- Reduce costs: Businesses can look for ways to cut expenses and become more efficient. This could include negotiating better deals with suppliers, implementing energy-efficient practices, streamlining operations or reducing waste. Additionally, outsourcing non-core business activities like accounting, legal and HR can also help a business reduce cost and improve focus on core activities.
- Government schemes and financial assistance: These programs can provide much-needed funding for small businesses to invest in new equipment, hire new employees, and make other essential investments to keep their business running smoothly and profitably.
Government Schemes available to Small Businesses
- Small Businesses Administration (SBA) loans: These loans provide funding for small businesses to invest in equipment, hire employees, and expand operations.
- Tax Incentives: The government may offer tax breaks or other incentives to small businesses that invest in new equipment or hire new employees.
- Government grants: There may be government grants available for small businesses who meet certain eligibility requirements.
- Community development financial institutions (CDFIs): CDFIs provide funding to small businesses in underserved communities and help them to access the capital they need to grow.
Each country and state has different policies to support small businesses, so it’s important to research and understand what options may be available locally.
Consulting with financial experts or government organisations that specialise in helping small businesses access government funding can be incredibly lucrative. Financial experts can help guide small business owners through the process of applying for government schemes and financial assistance, as well as help with managing the funding once it’s been received.
Conclusion
Inflation can be a significant challenge for small businesses and entrepreneurs, as it can erode profits and make it difficult to maintain financial stability. However, by taking a proactive approach, small businesses can take control of their finances and mitigate the impact of inflation.
Take the first step towards financial stability by reaching out to Kreston Stanley Williamson today. Our experienced team can work closely with you to create a personalised financial plan tailored to your unique needs and goals. The thing that sets us apart is our approachability and people. They are the reason you come to us, and they are the reason you stay.
If you have any questions, please don’t hesitate to contact your client manager.
Kreston Stanley Williamson
*Correct as of 25 January 2023
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under professional standards legislation
