As a small business owner, you know that running a business is
not always going to be smooth sailing. But with the interest rates on the rise,
it’s becoming harder for businesses to keep their heads above water.
Higher interest rates make borrowing money more expensive,
which slows down the economy and discourages consumers spending. This means that small
businesses will probably make less profits and it will be harder for
small businesses to invest in growth, pay employees, and keep the lights on.
And so, it’s become quite the dinner table topic. Everyone wants to know what they can
do to weather this storm and come out the other side stronger than before.
Which is why we decided to do this video. We want to help you understand exactly why the Reserve
Bank of Australia keeps increasing interest rates and how you can prepare to stay afloat.
Let’s start with the basics - interest rate rises are a normal part of the economic cycle.
The RBA has a target inflation rate of two to three per cent. If it exceeds that,
which it currently has at 7.8%, they need to work towards bringing it back
down to the ideal range. They do this by implementing what’s called a monetary policy.
The monetary policy dictates how to set the cash rate, which is the interest
rate at which banks lend money to each other. Now, monetary policy can either be expansionary
or contractionary. Expansionary policy stimulates economic growth and involves lowering interest
rates, while contractionary policy is used to slow the economy down and increase interest rates.
So, basically, what this means that if inflation is running above the upper end
of the target range, it may be an indication that the RBA will raise
interest rates to slow down the economy and bring inflation back under control.
This is because when the cash rate goes up, it becomes more expensive for banks to lend money, so
less businesses and consumers are going to want to borrow funds - which slows economic activity down.
On the other hand, if inflation is below the lower end of the target
range and other economic indicators, such as growth and employment, are weak,
this could signal that the RBA will cut interest rates to stimulate economic activity.
The current inflation rate is at 7.8% - so business owners should
prepare for further interest rate increases until 2024 when
inflation is expected to start declining to the optimal range.
The thing is, a lot of businesses have had it pretty good with super low borrowing rates
throughout 2021, but now that rates are going up, loan repayments are going to get more expensive.
And it's not just loan repayments that you need to worry about. Rising prices
and interest rates can also have a huge effect on how your business runs. It'll
be harder to expand or make improvements when it's more expensive to borrow money.
Plus, with the increase in the minimum wage,
some businesses might have to raise their prices just to keep up.
You might think that my business is doing well, so it doesn’t really impact me. Yes,
it does. Because the people around you and the business around you and the economy,
are slowing down. And as a result, that means your work will be slower,
the money will be slower, and it will impact your business eventually.
All of this could mean lower sales and reduced profits for your business.
So, what can you do to prepare and stay afloat?
Well, there are a few things you can do to get ahead of the game.
I’m guessing that if you’re watching this video, you’ve probably already gotten that dreaded email
or notification that the interest on your existing loan is due for an increase. So, the first thing
you should do is speak to your financial broker and accountant to review your existing debt.
See if there are other loan products you could refinance into to reduce interest
rates or if there are loan features that might help you optimise your loan.
And if you don’t have a reliable broker, ask your accountant to refer you to one.
Speaking to a broker alongside an accountant could help you allocate
your funds to the right places, to reduce interest expenses and minimise your taxes.
My second piece of advice would be to reassess your business expenses and see
where you can save. There are actually quite a few different ways you could
possibly reduce your expenses - but you need to find the best solution for your business.
One example would be to check if you’re getting the best deal on essential
services like insurance premiums, phone bills, and internet services.
You may also want to consider whether you can negotiate a rent discount with your landlord. But,
these days landlords have been trying to increase the rental income as well.
Or, maybe consider outsourcing some of your non-core business activities because
it generally is far more cost-effective than maintaining in-house staff. I know
this is hard decision to make but it could make or break your business.
Trust me, if you can evaluate your profit and loss statement and identify where you’re spending
the most, you can find creative ways to reduce business expenses and improve your bottom line.
Tip number three: update your pricing model.
Now, this one is easier said than done - I was in the same tight spot when it came
to the profitability of my business not so long ago - it can be pretty
tough to find ways to increase revenue without losing sales.
But, what I can say is that one of the quickest and easiest ways to
boost your bottom line is by raising your prices. It might seem counterintuitive,
but with inflation affecting prices everywhere, consumers are getting used to paying more. So,
you’ll probably find that customers are willing to go along with it.
Plus, if you can’t meet your demand, because there are just so many customers,
it might be a good idea to increase your prices.
Even a small price increase can make a big difference in your margins and profitability.
And the last thing on my list is to speak to your business accountant.
If you’re worried about how the recent rate hikes will impact your bottom line,
it’s a good idea to speak with your business tax accountant.
They can help you assess your current financial situation
and develop a plan to navigate the interest rate increases.
So, there you have it - if you want your business to succeed,
it's important to be proactive and plan for the future. And remember, our YouTube channel
is here to help you do just that. So don't forget to hit that like and subscribe button!
Thanks for watching, and we'll see you in the next video.