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Dispatches from the inflation frontline

 

A few years ago, first home-buyers were told to ditch the smashed avocado on toast to help them save for a deposit. But it’s not avocados that are putting the financial squeeze on one of Malcolm Chilman’s clients - it’s a simple head of iceberg lettuce.

Dispatches from the inflation frontline
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While the big supermarkets have a price tag of up to $11 for the salad staple, Mr Chilman’s client is still selling them for around $5 – which is basically what they cost him.

Like many small business owners around Australia, the greengrocer doesn’t want to lose his customers so has been bearing the brunt of the price increases he’s had to pay due to rising energy costs, supply chain issues and inflation, plus extreme weather events.

“My greengrocer client was mainly impacted by the flooding event that has substantially increased the cost of fruit and vegetables,” Mr Chilman says.

“Interestingly, his profits are suffering due to volume of turnover. He’s trying to maintain his margins, but because of the high prices, customers are only buying half of the produce so he’s only making half of his gross profit, and fixed costs are increasing.”

But there’s only so long that Australia’s small businesses can avoid the inevitable; they will have to pass on those extra costs they have so far been absorbing to their clients and customers. And hope for the best.

“I have another client who is a cleaner and hasn’t put up her prices forever and even though I keep telling her to, she is reluctant to pass on the costs to her clients,” Mr Chilman says.

“I find I have two kinds of attitudes among my clients – the ones that don’t want to put their prices up because they figure they’ve been doing the same thing for years and the business has been ticking along, or the other extreme like tradies who know their value and how in demand they are, and are quoting like they don’t need the job but getting it anyway.”

Mr Chilman’s business, Bottom Line Control, is based on the Sunshine Coast in Queensland and his clients are mostly typical small business, mum-and-dad operators.

“They come from all different sectors, and I don’t specialise in any industry,” he says.

“And until now, up here on the Sunshine Coast, business has been booming for most of them. The federal and state government stimulus packages pumped money into the economy – and especially into the micro-businesses – and the lockdowns were not as severe here as elsewhere.

“But we also had a lot of interstate migration, which has sent real estate prices crazy which is now causing a problem for our small business owners because their staff no longer have places to live. Staffing is becoming harder for them to source as housing affordability is through roof.

“The average worker has had to move out of the area to be able to get an affordable house. And on top of the staff shortages, they are now having to try and source materials. These are the two biggest things which are currently inhibiting any growth in their business.”

For the past two years, like most of his colleagues, Mr Chilman has been navigating the increasingly complex path of grants, government payments and support programs to keep his clients afloat, and now he’s having to have another difficult conversation: it’s time for clients to raise prices.

“Clients have to start to review their pricing because of the pressures on wages, the flooding impacts, the rising cost of fuel, supply chain issues. Inflation and energy prices haven’t quite hit yet but they will,” he says.

“From our perspective as accountants we can advise clients to know their market, what they are worth, what competitors are charging, and to try and find efficiencies in their business.

“There was the technology investment boost of 120 per cent announcement in the May budget that we still don’t have any details on, it could be a great time for clients to find tech efficiencies using apps and IT. And the Queensland government has also released a grant worth up to $50,000 to install new equipment.”

According to the Australian Bureau of Statistics in May, almost 60 per cent of businesses experienced an increase in the cost of doing business from February to April.

But the data also found that only 38 per cent expected to increase their prices by more than they usually do and nearly half (48 per cent) had no plans to increase their prices of goods or services over the next three months.

Of the 38 per cent of businesses that expect to increase their prices, the majority indicated increases to the costs of products or services used by the business (92 per cent) and rising fuel or energy prices (78 per cent) were the main contributing factors.

Of the 48 per cent of businesses that expect no increase to their prices, almost half indicated that the reasons were to retain customers (46 per cent) or having fixed price contracts (46 per cent).

With the Reserve Bank of Australia (RBA) lifting the cash rate to 0.35 per cent in May, the first interest rate hike the country has seen in more than a decade, then again to 0.85 per cent in June, many small business owners are feeling squeezed in every direction, from what Treasurer Jim Chalmers declared before he was elected “a full-blown cost of living crisis”.

Small businesses are the ones on the frontline of this crisis. They’re the ones copping the increase in products and services, and also the ones trying to soften the blow-out for their customers.

Guy Pearson, CEO and co-founder of client engagement and commerce platform Ignition, a company that specialises in helping accountants and professional services businesses build meaningful and lasting client relationships, agrees it’s time accountants had “the talk” with their clients.

“To navigate high inflation and supply chain crunches, alongside other global market challenges like widespread staff shortages, many small business owners are starting to think about pricing and expenses to protect their bottom line,” Mr Pearson says.

“Accountants play a critical role in helping small businesses understand how they should absorb these increased prices and keep some of their other costs down, to position their businesses for success.”

Mr Pearson, who is a chartered accountant, angel investor and entrepreneur, says small businesses are now coping with a perfect storm of negative influences.

“There’s inflation, pay demands, lack of supply of products and certain types of labour,” he says.

“A lot of small businesses used to rely on foreign students working in them and now they are all vying for the same labour. Then there’s fuel going up and supply chain costs going up, too.

“The biggest conversations accountants should be having with their clients is around pricing, negotiating supplier agreements, looking at prices and payment terms. And the other side is what accountants should now also be charging their own clients or customers. 

“They have to learn how to phrase all this, for both themselves and their clients, in not calling it a straight-out price increase, but what they can do to offer a value-added service.”

Mr Pearson says accountants are much better at advising their own clients to increase their prices to stay afloat than at having the conversation around their own costs for their own business.

He says if there is a reluctance from small businesses to increase their own prices, accountants need to be looking at myriad avenues to fund the cost of doing business.

“If clients are digging in on not passing on their costs, accountants have to start looking at other funding to help them, whether it’s grants or the ability to put in place things like buy-now, pay-later (but you need to be careful as that could just be loading their customers up with debt),” says Mr Pearson.

“There could be a way to change the relationship in the supply chain or turn up revenue, or bring in more sales with alternative solutions. They also have to look at wages, and costs that can be cut, but most small businesses don’t have enough staff at the moment.

“In reality, your suppliers still want your business, they still need customers so they should be willing to negotiate the level of finance and longer terms. These are the types of conversations that now need to happen. And go to your bigger suppliers. Don’t worry so much about the internet bill but look at the things that cost the most.”

It’s not the big chain stores that are now trying to find a way to tell their trusted and loyal customers that prices are rising – it’s the mum-and-dad family businesses, says Mr Pearson.

“Accountants have done the hard work over the past two years during COVID. They developed the knowhow to keep their clients going and understand their businesses much better,” he says.

“But now it’s inflation they have to deal with rather than just surviving the pandemic, and because accountants now have more tools in their tool bag and know their clients better than they may have before, they are in that role as a trusted adviser again.

“At Ignition, we have had to increase our own prices so we know how hard it is for our customers to have that conversation with their own clients. Our mantra is that if we can we help people to improve their relationships with their clients, if we can help an accountant increase their own prices and charge their value, it then makes them feel more comfortable doing it themselves and in turn, help their clients thrive.”

Leanne Hume, director of accounting firm Simply Numbers in Green Valley, NSW, says she is now having to start to increase her own costs, as well as advising her clients to do the same.

“I work from home, but I still have to consider the cost of doing business with the rise in energy prices and inflation,” she says.

“I have to look at my prices and how my time is spent. During COVID, I know myself and a lot of other accountants did a lot for free, and we didn’t worry about that, we let it fly. But after two years of doing that, I don’t imagine we can do it for much longer.”

Many of Ms Hume’s clients are in the transport and logistic space and she says they are now feeling the effects of rising fuel costs.

“The price of fuel is squeezing them and they are having to review their own prices and increase them,” she says.

“And that is something that is going to continue as there will be ongoing fuel price increases. Obviously, they have to pass on those increases and they are starting to do that now.

“I feel most business owners are fairly switched on with their businesses and they are generally on the front foot with things. My clients that are in the transport and logistic businesses are basically looking at their costs and seeing big increases in the cost of doing business and know their costs have to be passed on.

“But the advice you can give as an accountant has to be individualised depending on the business and how that business runs. For example, my construction clients have a different problem. They have a supply chain issue. Timber is hard to come by and there has been a price hike in its supply.

“Construction companies are going under because they can’t maintain their businesses on fixed contracts.

“But I think the average person knows the situation and understands to a certain degree why businesses have to put up their prices. Some of my clients are prepared to wear a bit of short-term pain but I don’t imagine that in six months’ time it will be a good scenario.

“We have all just been though a horror two years and now this comes on the back of that and it’s not good. Businesses are trying not to pass on too much of their increased costs but if the situation progresses it will lead to even further increases.”

Ms Hume says although many of her own clients are doing it tough, most are determined to keep trading.

“Businesses hold on for a while, absorbing costs to keep things running, but if there is an extended period of prices increases it is going to hit them,” she says.

“It’s through no fault of their own that they are in this situation and from a human perspective it is very distressing to see your clients suffering.

“They are pretty resilient at this moment in time, but in six months’ time it could change. Going forward I’m hoping my clients will be able to operate through this next period. They got through COVID pretty well and haven’t had to shutdown. Business may have been a bit slower, but unlike hospitality they haven’t had to shut their doors.

“There’s still a little bit left in the petrol tank but I wouldn’t like to see things going down this path for too long.”

No one wants to run out of fuel when the price of keeping going, just keeps going up.

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