In today’s economic landscape, private businesses face a myriad of challenges that can significantly impact their operations and profitability. The current economic conditions, characterised by rising costs and high interest rates, necessitate strategic planning to maintain your business’s financial health and competitive advantage. This article explores the key economic factors affecting private businesses and offers some ideas as to how you can manage costs and drive profitability.
Some of the impacts on businesses from the current conditions are putting upward pressure on your cost structures. Some of the key areas of pressure include:
Rising inflation – Inflation remains a significant challenge for businesses, with many costs increasing across their supply chain and their cost of materials and inputs continuing to increase year on year.
Staffing pressure – Australia and New Zealand are still facing a talent competition challenge, as a shortage of staff in certain industries is driving staffing costs upward for most businesses.
Interest rates – Many businesses that rely on financing, whether for the short or long term, will be feeling the pressure of the current high interest rates. While there are expectations that rates may begin to decrease, they remain elevated and can impact not only existing cashflow but also any plans for growth.
Energy costs – While all businesses will be suffering from increased energy bills, those in energy intensive industries like manufacturing will feel a significant impact on their bottom line. Many states currently have incentives for renewables that may help offset these costs.
How can businesses deal with these pressures?
There are a number of strategies that businesses can use to manage their costs:
Review your pricing models – As cost structures on businesses rise, business owners must regularly review their pricing strategies and consider necessary updates to their prices.
If the cost impacts are not passed on to customers your own profitability will suffer. It is crucial that you track the costs in your business and make sure you are proactive in reviewing and updating your pricing where appropriate.
Other changes referenced below may also help alleviate pressure on your pricing and a review of your pricing model should be conducted to consider these positive impacts.
Review your major costs – Start by reviewing your Profit and Loss and identify the main costs to your business. Consider the following questions –
- What can you do to renegotiate or adjust the cost that your business incurs?
- Are there other suppliers that you could use that may offer a better price?
- How long has it been since you went to the market to consider the price for your key materials for the business?
Analyse your significant costs and conduct research. For example, if a significant part of your costs is tied to communications, explore how other companies are cutting expenses in this area or which suppliers they are choosing. Where practicable, preparing a tender document of your needs and using that to canvass potential suppliers, including your existing supplier, can lead to cost savings.
Consider better leverage of technology – Investing in technology can help the business streamline its operations, reduce costs and improve efficiency and accuracy. This may include adopting automation, data analytics and digital tools to enhance decision making and operational performance.
Businesses that embrace and invest in technology tend to outperform their competitors and are positioned to seize opportunities, even in a tough market.
Effective financial management – Effective financial management is crucial in an environment where costs are increasing. To begin with, businesses should focus on:
- Having an up-to-date and accurate financial budget for your business, ideally including a cashflow forecast
- Tracking and monitoring your performance against the budget and forecast
- Improving your cash flow, chasing debtors and using allowed terms on your creditors
- Reducing debt and exploring alternative financing options to maintain financial stability
- Collecting and using financial data to be able to make informed decisions about what you can do to improve your business performance
Invest in employee development – Investing in employee training and development will have a number of positive flow-on effects for your business, including reduced turnover and increased productivity and efficiency.
The current economic conditions in Australia present significant challenges for businesses, but with the right strategies, you can navigate these obstacles and continue to thrive. By managing costs effectively, reviewing pricing models and leveraging technology, businesses can drive profitability and maintain a competitive edge in a challenging economic environment.
If your business needs help in reviewing your costs, planning your budgets and cashflows and updating your pricing models, contact your local William Buck advisor in Australia and New Zealand.
