o btaining f inance, i nflation and r ising i nterest r ates What you need to kno W

Phil Chaplin | CEO CF i Finan C e Grou P

About the Author

Phil Chaplin is the Chief Executive Officer of the CFI Finance Group, a specialist finance company servicing Australia’s franchise, accommodation, and fitness sectors as well as small businesses more broadly. He has over 20 years’ experience in providing finance to businesses across Australia and New Zealand and has managed finance companies in the private and banking sectors. Phil is a former chair of the Equipment Finance division for the Australian Finance Industry Association and has been called on to provide insight and input into government policy, industry education, and to international players seeking to enter the Australian finance sector.

On a pretty Excel chart, the last 10 years of Australian and New Zealand interest rates is a gentle ski-slope upon which businesses and investors have been able to ride relatively smoothly (at least as far as borrowing money is concerned). In fact, until recently, the last time Australia saw a lift in the target cash rate was late 2010, and New Zealand around 2014. For both countries those increases were short lived, dropped back down quite quickly, and from that point on they just seemed to keep falling.

It’s a good thing too, with a GFC hangover, climate driven events, global pandemics, and a range of other factors creating economic headwinds against which all of us need to sail. But economics is a fickle beast, with some adversities driving the need for stimulus and others providing cause to show restraint.

Those gentle ski slopes hit a very steep jump in early 2022, with a sharp increase on both sides of the Tasman as central banks across the world attempt to curb rising inflation. For many small business owners (and prospective owners) this can mean dealing with an increasing cost of debt for the first time, and like anything new, it can all be a little scary.

Whilst there’s almost certainly a little more pain to come, it’s worthy of note that today’s ‘high’ interest rates are only now back at 2015 levels (a time of relative economic stability) and most economists would suggest they are still ‘a little low’. All this change begs a few big questions; What is inflation? Why does it make interest rates go up? What does it all mean? And where will it end?

What is inflation anyway?

Put simply ‘inflation’ is the rise in costs of goods and services over time. High inflation means the price of things is going up fast, low inflation and prices are going up slowly. Inflation is significantly driven by supply and demand, if demand is high and supply is low then prices will rise. When supply issues flow into the most basic commodities (think energy in the form of oil and gas) those price increases can quickly spill over into almost everything. Take food for example; as the cost of farming, shipping, refrigerating, and selling food goes up it hits everybody’s hip pocket, now people need to be paid more just to afford exactly the same groceries that they bought last week. Money, in terms of what it can buy for most people, is worth less than it was a week ago. so

why are interest rates going up?

At its heart, raising interest rates is designed to discourage some consumer and business spending, the theory being that if you can restrict demand then supply can catch up and things can come back into balance. Of course, you can only restrict supply of necessities so much, but when central banks raise interest rates, they hope that enough people will restrict their spending (or not have money to spend) that it makes a difference.

Firstly, it’s important to recognise that one of the factors that drives inflation is high consumer spending. Part of what the central banks are trying to do by raising interest rates is to ‘normalise’ consumer spending and reign-in what they consider to be excess. unemployment is low, wages are starting to see real growth because of the tight labour market, and people still have money to spend. Central banks don’t want to stop spending, they just want to limit some of the factors that drive up prices.

Secondly, we need to remember that life goes on even in times of rising inflation. Depending on their target markets, and the goods or services they supply, there are a range of strategies that businesses can apply to address the impacts of inflation. If you’re starting a franchise business the first question to be asking your franchisor is “What strategies are in place (or are being considered) to combat the impacts of inflation?”

Here’s a few things to consider (whether you’re already in business or planning to start one):

- Raise Prices… Now some of you might be thinking, ‘hey wait a second, aren’t rising prices the problem?’ – Yes and no. In times of inflation people expect prices to be increasing. One of the things driving inflation right now is spending power, people have money to spend, and supplies of certain things are limited. Small and medium businesses are often the last to raise prices, thinking they’re protecting their customers. The big players in town have no qualms about raising prices and/or looking to increase their margins.

If you did your business plan a few months ago, go back and review your assumptions. Are your costs right? Is your sell price right?

- Prioritise your most profitable products and services… It’s always worth looking at your product range and making sure you’re focused on delivering those things which give you the best margin. Highlight ‘specials’ based on what works for you, actively cross-sell, up-sell, or alt-sell. Check over your product range and make sure you’re positioned for the best margin. Everyone knows the story of American Airlines saving $40,000 per year by removing one olive from each salad. Find your olives!

- Remember, not everything inflates at the same rate… Whilst economists distil inflation down to a single number, obviously not everything increases in price at that rate. Seasonality still matters, an over or under-supply of products due to external factors (flood, war, etc.) still makes a dramatic difference to the price of certain things. Many of these things can change very quickly. It’s important to look for value and to not simply assume that everything is or always will be more expensive.