Today marks the first day of the 2023 financial year, so happy New Year! With the advent of modern accounting software, the ‘end of the financial year’ isn’t the palaver that it once was and now tends to pass relatively uneventfully. But one of the downsides of this is that some of the beneficial disciplines that EOFY used to bring have fallen by the wayside. One of those is financial goal setting.
These could be around business – something like revenue generation, profitability or margin targets are all simple but well worthwhile. These could also be personal in nature. For example, according to the Financial Capability Survey completed last year, NZ scores 43 out of 100 for preparedness for retirement – so unless you’re planning on a diet consisting entirely of baked beans and 2-minute noodles, having some coherent goals around this might be helpful.
‘Cost of Living Crisis’ and ‘Pain at the Petrol Pump’ make for attention grabbing headlines, but the rather dull sounding explanation (or at least primary cause) is inflation. It’s clear that we are living in inflationary times now – BNZ economists are suggesting we are running north of 7% annual CPI inflation – which may understate real inflation. So the guts of it is; lots of prices of lots of stuff is going up. Which for anyone who has filled a supermarket trolley of late, will come as no great surprise. However, it’s been a really long time since such high inflation hit our shores, so what does this mean for business, and what can be done to prepare?
Money’s probably gonna get more expensive. Part of the reserve bank’s mandate is to keep inflation at a reasonable level, between 1 and 3 percent. When inflation blasts past this, their toolkit is pretty limited. They can pump the brakes a little by talking about lifting the interest rates via the OCR; the Official Cash Rate. If that doesn’t scare inflation down, they can actually lift the OCR. That’s about it. The OCR is one of the factors that influences the interest rates charged by banks. So, OCR goes up, and sooner or later, banks interest rates go up.
In the first instance, this makes it more expensive to borrow money to purchase productive assets, so it’s more expensive to grow a business using borrowed money. It also makes it more expensive for consumers to splash out. Rising house values and record low interest rates have made Mum-and-Dad-Homeowner feel rich, so they have been more inclined to spend up large on new cars, renovations, new toys or whatever else has tickled their fancy. This has trickled through to the rest of the economy as those businesses consume products and services to fuel their growth. However, if interest rates increase markedly, servicing a mortgage cost more, meaning that for those with debt, there is less cash available to spray around.
Let me give you an example, if you have 10 years to go on your mortgage and you borrow an extra 50k to do some renovations, if you locked that in at 2%, the interest cost would be $5,208 over the life of the loan. Let’s say (very hypothetically) interest rates jump up to what they were in March of 2008, 9.6%, then that interest cost jumps up to $27,967. Ouch.
At the same time, because everything has gotten more expensive, your dollar doesn’t go as far. As the cost of businesses inputs (raw materials etc) go up, margins get squeezed. This coming at the same time as consumers spending less means that businesses face a double blow of reduced demand and margin pressure.
- So, if you’re in business, and you think that inflation is going to increase, what are some practical things you can do to prepare?
- Debts – If you have debt on a variable rate facility, look to see if you can lock it in to a reasonably priced fixed rate loan
- Understand your margins – know exactly what each component costs you so that as price increases come through, you are crystal clear what you can stomach and what you can pass on
- Tie in your suppliers –negotiate agreed pricing for a predetermined length of time
- Give your customers some love – if they are going to be under financial strain, give them a reason NOT to go price shopping
- Tighten your belt – efficiency has become a throwaway term, but its definition is this: achieving maximum productivity with minimum wasted effort or expense, so make your business this sort of efficient
- Put up your prices – as the costs of running your business go up, put up your prices to ensure you still receive a fair margin
At this point, inflation looks like a near certainty and a global phenomenon. What are you doing to prepare for inflation in your business? If you’re not sure, get in contact.
Have a great April, and 2023 financial year!