Top tips for small businesses to handle the sharpest inflation growth since 2009

Accounting experts have urged Australian small businesses to prepare for the impact of inflation, after official figures confirmed the cost of living has surged at a rate not seen in more than a decade.

Consumer price index (CPI) figures, released Thursday by the Australian Bureau of Statistics, show the cost of goods and services rose 2.1% over the March 2022 quarter, lifting the annual inflation rate to 5.1%.

Underlying inflation, a measure which strips away the most volatile price changes, rose to 3.7% — the largest single increase since March 2009.

The cost of transportation surged 13.7% over the quarter, the ABS said, as conflict in Ukraine drove fuel price increases across the globe.

Shortages of materials and labour in the building industry helped the cost of housing rise 6.7%, while the cost of new dwellings for owner-occupiers lifted 5.7%.

While non-discretionary goods and services faced the biggest price hikes, the inflation of discretionary purchases — that is, items and services households are likely to abandon in the face of rising costs — also grew by 0.8%.

Those price hikes are now flowing through to Australia’s small business sector.

Of particular concern are newer firms which have never experienced such a sharp increase in quarterly inflation.

The Australian Securities and Investment Commission shows the number of registered businesses rose from 1.68 million in March 2009 to 3.03 million in March 2022, meaning many business leaders and entrepreneurs are experiencing severe price hikes for the first time in their careers.

Businesses should budget for a 5% wage rise: CPA Australia

Small businesses must put steps in place to manage the impact of that rising inflation, says Gavan Ord, senior manager of business and investment policy at CPA Australia.

Of primary concern are wages: surging inflation means workers’ pay packets are falling behind in real terms. And with the labour market as tight as it is, many workers are eager to seek higher-paying opportunities, putting the onus on businesses to boost their compensation.

“Business should factor in a 5% wage rise” to get ahead of those challenges, Ord said.

“That doesn’t mean it’ll happen, but businesses need to be prepared for this scenario.”

Executing that tactic could require a deep dive into business operations.

“We recommend that businesses work with their accountant to model the impact of inflation,” Ord added.

Such modelling should take the likelihood of falling discretionary spending and rising input costs into account.

Accountant Lisa Greig, founder of tax and business advice service Perigee Advisers, says many of her clients are “doing all the right things by” voluntarily lifting employee wages, even as it “cuts into their profits and the wages they pay themselves”.

“It’s a very difficult and delicate balancing act for the small businesses, because it’s cutting into the margins.”

Focus on high-margin goods and services

Businesses should also turn their focus to high-margin goods and services, Ord 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, Greig 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 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.

On Tuesday, 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.

But underlying inflation of 3.7% is well above the 2%-3% band targeted by the Reserve Bank of Australia, leading ANZ, NAB, and other economists to suggest the central bank could lift interest rates in early May.

Raising the cash rate target from 0.1% 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.

The RBA itself has previously indicated it wants to see a significant lift in wages before hiking up interest rates, with the next Wage Price Index arriving May 18 — just days before the May 21 federal election.