Key points
- Monthly or quarterly budgeting helps manage inflation and reduce costs.
- Inflation squeezes cash flow and raises loan repayments, hurting profitability.
- Budgeting supports both cost control and revenue growth for business resilience.
Businesses are battling rising costs and inflation. With inflation reaching a high of more than 8% last year and taking time to come down, some business’ margins and cash flow are being squeezed to breaking point.
An effective but overlooked or under-utilised tool in managing inflation pressures is the business budget.
Budgeting monthly or quarterly, rather than yearly, can help contain or reduce costs. Businesses need to focus on growing turnover as well as managing costs to boost profit during inflationary times. A better budgeting process can help businesses to do both.
What is inflation?
Inflation is measured by the Consumer Price Index and is the rate at which prices are increasing compared to previous periods. It occurs when a country’s money supply is growing faster than the economy or when demand for goods and services is higher than supply.
Inflation rates in Australia and the rest of the world are at levels not seen for decades. Australia’s monthly inflation rate in August 2023 was 5.2% and as high as 8.4% in December 2022. The Reserve Bank of Australia does not expect inflation to return to that 2-3% target range until late 2025.
How are inflation and rising costs hurting Newcastle and Hunter businesses?
Inflation and rising costs impact business cash flow. The spending power of the cash a business has is lower. Expenses end up being higher than budgeted.
Inflation results in a double whammy for businesses with loans or financing on variable interest rates. To combat inflation, the Reserve Bank of Australia has been increasing official interest rates. Businesses end up with higher repayments on their loans. Australia’s official cash rate increased by 4% between May 2022 and May 2023.
Ultimately, rising costs and inflation eat into profits and business viability.
A good example is the construction industry. Construction is booming yet many construction – related businesses are going to the wall because of a perfect storm including cashflow pressures from rising costs.
What is business budgeting?
A budget helps businesses keep cash flow healthy by showing business owners and managers what they can afford to spend and when. It provides a focus for reviewing and keeping spending as efficient as possible.
But business budgeting is about more than managing costs. Business budgeting is a process of estimating what the bottom line or profitability should be. From there, business owners can look at what they need to do from a cost and a revenue perspective to meet that profit target.
While the most recent Federal Budget had some measures to help small businesses with cash flow they are less generous than previous incentives. Better budgeting is a more sustainable and effective way for businesses to manage cashflow and profitability ongoing.
Businesses should budget monthly or quarterly, not yearly
Budgeting is particularly helpful in periods of rising or high costs and inflation because it helps businesses to set a new benchmark.
Many businesses take the approach of looking at last year’s budget and seeing if they can better it. The problem with this approach is that, especially in periods of increasing costs, last year’s budget is no longer relevant. With input prices for Australian businesses across many sectors rising monthly, budgeting using data up to 15 months old is useless.
More frequent budgeting shows business owners the peaks and troughs of their cashflow. If business owners know when cashflow will likely be a problem they can try to minimise costs during that time.
Budgeting monthly or quarterly also allows businesses to reposition more quickly. Business owners can try something and see if it works.
More regular budgeting makes a business accounting system a live and future focussed system rather than an historical one.
Focus on increased turnover not just cutting costs for business profit
Greater turnover ultimately drives business profits.
Cutting costs works to a degree but the reality is many businesses don’t have much fat to trim or costs to cut. Short term cost cutting such as reducing marketing or cutting staff can be counter-productive because this impacts the ability to generate revenue.
Budgeting helps a business to identify and own its turnover projections. Businesses should look at what additional products and services they can sell to existing clients and to new clients. The next step is identifying new products and services. Although in times of poor cashflow, this may not be possible if extra expenses or machinery are needed.
A good business advisor can help businesses manage inflation and rising costs
A good business advisor can help set up a budgeting and reporting system that puts the right business data in and efficiently delivers timely data to drive better business decision making. More importantly, a business advisor can help analyse the data and suggest actions a business can take, in good times and bad.
Pitcher Partners’ business advisors and accountants understand the pressures inflation and rising costs are placing on Australian businesses. They also know how powerful the right budgeting system can be in helping businesses to manage costs, drive turnover and improve profitability, especially in periods of rising costs.
