“Be realistic and don’t be pessimistic”

“Be realistic and don’t be pessimistic”

What Economists & Successful Business Leaders Project for the Next 2 Years

Did you know about these economic realities?

  • USA inflation was 9.2% for June 2022 and as you know when the US sneezes AUD catches a cold, so
  • Australian inflation is conservatively expected to be 6.2% for August and 7.0% for September but consider these specific increases
  • The price of groceries (fresh, frozen & packed) increased by 12.2% between January to June 2022
  • Rents are up 5.8%
  • Cars are up 11.4%
  • Fuel $1.15 to $2.43
  • Beer is up 9% (with further 15% over the next 2 years due to the increased cost of transportation,  aluminium, glass, and truck driver wages).
  • The official cash rate is now 1.35%, compared to 0.1% 3 months ago, but let’s put this into perspective as it was 1.5% pre COVID.
  • AUD government debt today is circa $1.1 trillion accruing interest at the increasing official cash rate.
  • The Australian government (as many other world governments are) is continuing to additional debt to fund economic and political debt as well as supporting ongoing disaster relief in Australia, and in other countries.

So where is this all headed ?

  • The major banks are predicting the official cash rate to continue to rise as the Reserve Bank tries to get the inflation rate under control to get the inflation rate between 3% to 4%.
Depending on the bank. Its predicted …
  • That by late December 22 and February 23 the official cash rate will between a low of 2.6% and a high of 2.85%
  • The official cash rate will continue to rise over 2023 to somewhere between 3.35% and 4.5%. This means home loan interest rates will be between 7% and 8% with business and investment interest rates over 10%
  • The hopeful sign is that some economists predict that the official cash interest rate will settle after two years in 2024 to somewhere between 2.6% and 2.8%
  • Low unemployment rates, rising cost of living, higher interests, ongoing COVID and other health challenges will all act in a perfect storm to continually push wages and salaries higher over the next two years.

What does this all mean?

  • How will the government repay the $1.1 Trillion debt as well as the accruing interest? Will it reduce government spending? Increase income taxes? Increase GST? Or a combination of some or all. The next federal budget will be interesting to say the least.
  • Economists believe the majority of reserve banks, of the major economies around the world, will make finance very difficult for those business that do not meet the new higher requirements for Loan to Value Ratio (LVR) and interest coverage. As a business owner, it will be essential that you have good cashflow.
  • Money will get harder to get from your customers as well as the banks. Those businesses that have the below in place are tipped to be the survivors if not winners over the next two years. This will be no surprise to any of us as we all know that these are the characteristics of any well-run business. The question is, can your business tick off all of these, and if does tick some or all of these what do you need to do NOW to really hone in these attributes?
    • planned out and projected what their cash flow requirements over the NEXT 2 YEARS (given the above projections)
    • lessened their own exposure and requirement on debt finance
    • strong control over their working capital
    • tight control of accounts receivable
    • know their people & how to keep them engaged and more productive
    • know the business cycle of their business, their competitors, as well as other businesses
    • identify and take advantage of your competitors failures
  • Be optimistic by knowing and understanding your business and your own limitations and abilities keeping in mind that predictions will have this over in the next 2years.
  • Watch your competitors and Industry to see what they’re doing but whatever you do, optimise your service and quality of product and, at all cost, avoid discounting prices.
  • But if you are forced to lower prices make sure you do so know exactly what your even break price is. (Break even is when your selling price covers ALL direct cost of sales expenses AND ALL fixed and variable indirect/overhead expenses. Regretfully many SME business owners think breakeven is when you just cover direct cost of sales expenses)
  • Focus on balancing your overhead expenses to still achieve your medium- and long-term growth plan
  • Lastly, as cash flow becomes strained, some business owners may begin to fall behind with their tax, super and other compliance obligations. It will be essential that these obligations be built into your cash flow budget so that they are consciously managed. It will be essential that you keep informed of what your ongoing payable tax obligations are as well as seek and investigate all legal strategies to minimise your tax payable. Tax Minimisation will be front of the mind for many.

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