Who actually knows…
The RBA lifted the cash rate to 1.85% in early August 2022. The increase comes a few weeks after 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.
“…we should expect interest rates of 2.5% – how quickly we get there really depends on inflation.”
The RBA Governor has come under increasing pressure over comments made in October 2021 suggesting that interest rates would not rise until 2024. At the time however, Australia was coming out of the Delta outbreak, wage and pricing pressure was subdued, and inflation was low. That all changed and changed dramatically. 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.
With interest rates rising, what can we expect? Deputy RBA Governor Michele Bullock recently said that Australia’s household credit-to-income ratio is a relatively high 150%, increasing in an environment that enabled households to service higher levels of debt. But it is not all doom and gloom.
“Strong growth in housing prices over 2021 and early 2022 has boosted asset values for many homeowners, with housing assets now comprising around half of household assets,” she said.
The recent downturn in house prices has only marginally eroded the large increases over recent years. Plus, households have saved around $260m since the pandemic creating a buffer for rising interest rates. This however, is a macro view of the economy at large and individual households and businesses will face different pressures depending on their individual circumstances.
For businesses, the rate increase has a twofold effect. It is not just the rate rise and the higher cost of funds in their borrowings. That by itself is significant but at this stage, if anything, it is the lesser issue. The more significant impact comes from negative consumer sentiment and the flow through effect on sales and cash flow.
• 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.
Now is the time to prepare a business budget and forecast – this is something we can assist with.
Why we developed this service.
Cash is the lifeblood of any business; even profitable businesses can fail because of poor cashflow.
Every business should undertake an annual Cashflow Forecast to aid their planning and decision making. We want our clients to be proactive in managing their cashflow; not assuming they only need one if the bank asks for it.
If you know how much money will be coming in and out of your business, and when, you can confidently plan and execute desired growth and improvement strategies to achieve positive changes in your business.
Who should undertake this service?
Every business should prepare a Cashflow Forecast each year; even if your business has a positive cashflow. An annual Cashflow Forecast can help you unlock a lot of cash, just by making a few changes.
What is involved?
We’ll draft your Cashflow Forecast using the information from your accounting software. We’ll then send you the draft to review, along with some questions to make sure our assumptions are correct and to find out if we need to adjust the Cashflow Forecast for any changes you’re aware of in the next 12 months.
We’ll then meet with you to review the draft Cashflow Forecast and discuss seasonal fluctuations, material changes to last year’s cashflow, any implications of staffing changes, significant one-off items, tax payments and timing, and capital expenditure. Following this meeting, we’ll finalise your Cashflow Forecast in your accounting or reporting software.
We recommend you create actual vs. forecast reports each month to track your progress and clarify areas that may present improvement opportunities. We can also help you with this.
When should I have a session?
If you don’t prepare a Cashflow Forecast annually, this is something you should prioritise as soon as possible. The sooner you understand your cashflow, the sooner you’ll be able to make better informed decisions and implement strategies to improve your cashflow.
Benefits of an Annual Cashflow Forecast
- Gives you an understanding of your cashflow for better decision making
- Enables you to predict and plan for large cash outflows
- Identifies key drivers of cashflow in your business
- Allows you to monitor your actual cashflow against forecast in your accounting or reporting software
- Identifies ways to avoid late payment penalties and interest from suppliers
- Provides peace of mind that your cashflow needs are known and properly funded
- Improves communication and relationships with your financiers and suppliers
Please contact us today if you would like to discuss any of the above further. If you have a budget but would like some more accountability around your numbers we can facilitate meetings to help keep you on track.