26 September 2022

Should businesses raise prices to keep up with inflation?

| RSM Australia
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Business owners are facing a tough time in the post-COVID world. Photo: RSM.

Any relief from price rises is welcome at the moment but what if, while visiting a retail store, you see a notice that says, “We are proud that we haven’t raised our prices, even in light of current events”?

While this is a lovely sentiment, perhaps your immediate concern should be whether the business owners had thought this through and if their profit model was sustainable. As customers, we obviously don’t want to see a price increase but we would be more upset if one of our regular shops was not around in six months’ time.

There is no denying that many business owners are facing tough times right now. The lockdowns of previous years had their challenges, but for some, today’s challenges may be even more concerning.

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RSM principal business advisory Thiru Kandiah says the rising cost of goods and services means businesses are paying more for supplies and energy and much more for fuel. Labour shortages and the increased superannuation guarantee mean they’re also paying more for staff. In addition, rising interest rates could mean they’re paying more to service business loans.

“The current landscape makes it more important than ever for business owners to step back, evaluate their business holistically and look for opportunities to cut unnecessary costs, such as by moving to a small office space, evaluating new suppliers, changing loan providers and leveraging technology to be more efficient,” Thiru says.

“Inefficiencies can be a huge drain on a business and its resources. Having a skilled third party conduct an internal audit is often very valuable in pinpointing areas to improve and save money.

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“Letting go of staff when finances are tight is never a preferred option as it can be difficult and costly to onboard new ones if business demand grows. Scenario planning and forecasting is the best way to do this, and your accountant or business adviser should be able to assist.

“If you have overdue tax debt, don’t ignore it. Interest and penalties on overdue payments, where there is no payment arrangement in place, will keep accumulating and could become significant. It is best to engage with the ATO or ask your accountant to act as a mediator on your behalf. Look for an acceptable payment solution that will effectively pay down your debt without putting extreme pressure on your cash flow.”

Last, there will almost certainly come a time when you need to raise your prices. No business wants to lose customers, but you need to ensure that you will have a business at the end of the day.

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“Set time aside regularly to do a health check of your business, including cash flow, products and services, profitability and pricing,” Thiru says.

“Trusted accountants and business advisers are always available to help and can provide a free health check so you can get a true picture of how your business is performing.”

To speak with an RSM adviser, contact your local RSM office.

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Capital Retro7:21 am 01 Oct 22

The hardest decision to make if you have a small business in Canberra is to know when it costs less to close the doors or to keep them open.

Depends how often the minimum wage gets increased to catch inflation.
Most small business costs much more than they make in the first year.

Capital Retro9:33 am 02 Oct 22

Wages are only one component. The costs that can’t be controlled are the ones governments and regulators impose.

Businesses should triple the prices for politicians

This article shows a disturbing lack of understanding of basic economics. Unless you are a monopoly you do not set your own prices. Businesses are price takes and will produce up to the point where prices are equal to the marginal cost of producing the next good or service.

Also worth considering that we’re only just getting started in the cost of lockdown crisis. It’s going to get a lot worse before it gets better.

I don’t blame any small businesses for what’s coming. This is entirely the fault of governments.

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