The RBA has lifted the cash rate over consecutive months. That leaves us to ask a very important question – How high will interest rates go?
Earlier, Reserve Bank Governor Philip Lowe told the Australian Strategic Business Forum that “…we’re going through a process now of steadily increasing interest rates, and there’s more of that to come. We’ve got to move away from these very low levels of interest rates we had during the emergency.” He went on to say that we should expect interest rates of 2.5% – how quickly we get there really depends on inflation.
Inflation is now forecast to reach 7.75% over 2022 before trending down. We’re not expected to reach the RBA’s target inflation rate range of 2% to 3% until the 2023-24 financial year.
For businesses, the rate increases have a twofold effect – cost of funds and consumer sentiment.
It is not just the rate rises and the higher cost of funds in their borrowings. That by itself is significant but at this stage, it is the lesser issue. The more significant impact comes from negative consumer sentiment and the flow through effect on sales and cash flow.
Advice for business owners
- In general, your debts should not exceed around 35-40% of your assets. There will be some exceptions to this with new business start-ups and first home buyers.
- Review the cost of cash in your business, reviewing rates, and the configuration and mix of loans to ensure you are not paying more than you need to.
- If possible, avoid having private debt as well as business and investment debts. You can’t get tax relief on your private debt.
- Keep an eye on debtors and don’t become your customer’s bank.
- If you do not have enough cash to meet your liabilities, act quickly. Do not wait for your creditors and the ATO to start knocking on your door. There are measures and planning you can undertake to save your business – without liquidators and bankruptcy.
Look after your mental health
Beyond Blue NewAccess for Small Business Owners program is specifically designed to help and support business owners.
The program is a free one-on-one confidential mental health coaching program, developed by Beyond Blue to give small business owners, including sole traders the support they need.
If you are struggling, please know there is help available to you. Call 1300 945 301 or visit their website Beyond Blue – NewAccess for Small Business Owners.
How can Walsh Accountants help?
We understand this is a time of great stress and financial pressure for many business owners. Please know, you are not alone.
If you are struggling to meet your financial commitments, please contact your accountant. We can discuss your situation and if needs be, put you in contact with specialists that can help you better understand your financial situation and provide options for recovery. They can work with you on a turnaround plan that will help you salvage your business – without the need for bankruptcy or liquidation.