After reading the first article, you’ll understand why it is essential that inflation stays at 2-3%. But being your trusted advisor, we don’t want to just inform you about what’s going on. It’s our job to help you find solutions to problems like these. This article will provide you with an overview of the current spending situation and some advice to help you adjust your spending habits so you’ll make the right choice every time.
Let’s start with the financial pressures that individuals and businesses are facing.
Before you can take back control, you need to have a firm understanding of what’s going on. For most individuals, the highest cost in any household is their mortgage. We were fortunate to have the cash rate stabled at 0.1% from November 2020 to April 2022, but that lucky time has ended. In just the last few months, the cash rate has increased to 1.35%. This means that homeowners will now have to pay over 10 times more on mortgages every month.
Our next headache is groceries. We’ve all heard about the dreaded price hike for lettuce, peaking at $12 per head. But that’s not the beginning or the end of the story, the price of green beans at some locations has reached $39.99/kg, cucumber is at $15/kg, and broccoli at $17/kg. The price of food hasn’t been this high in a decade!
And pantry staples haven’t been spared either. Over the last year, the price of olive oil has increased between 30-50%, pasta by 30%, and instant coffee has risen by a whopping 47%. Remember the good old days when coffee was $1.50? Paying $4 for a cup of coffee could soon be a thing of the past as well. David Parnham, president of the Café Owners and Baristas Association of Australia, warned that a cup of coffee could cost up to $7 by the end of the year.
And all of this is before we get to fuel, which has jumped by 35% in the last 12 months, the largest annual increase since the 1990 Iraqi invasion of Kuwait. We have a client who’s spending an average of $400 per week on fuel. And he’s not even running a delivery business!
For businesses, the biggest cost in any book is wages. The annual wage growth in the last quarter (2.4%) is the highest annual rate recorded since December 2018. And yet, it’s still falling well behind the rising cost of living. Office and fit-out costs have gone up the roof due to the cost of building material supplies increasing by 15.4% in the last year. While remote working may have increased in popularity, many businesses still need physical premises to maintain effective communication and work culture. And let’s not forget how energy prices have gone up an average of 60% in some sectors.
The Australian Bureau of Statistics found in the last Consumer Price Index (CPI) release for the March Quarter that 70% of the goods in the CPI “Basket” had an annualised inflation rate above 2.5%. To put this in perspective, the last time we saw a generalised price increase like this was before the Global Financial Crisis. And we still have the upcoming CPI that’ll be released on July 27, which is not looking optimistic. With the Reserve Bank forecasting that inflation will only peak at 7% later this year, the worse is yet to come.
Ultimately, you can’t control prices, but you can control what you buy.
Interest rates will keep rising until inflation is stabilised at a comfortable level, so household expenditures will need to be carefully monitored. Take this opportunity to start spending wisely. Tailored Accounts may not be financial advisors, but we are experts in budgeting. One of our interns has, with the help of 2 senior accountants, built a free Excel spreadsheet to help you manage your household budget and achieve your saving goals.
Simply input your monthly earnings, cost of monthly repayment for your home, investment properties, as well as other major costs and/or earnings, and you’ll be able to see if your income is sufficient to cover your average expenditure. If not, make adjustments to your spending to balance the books!
Back when interest rates were low and the economy was good, we all bought things that we probably didn’t need. Now is the perfect time to start trimming down the waste. Keep your spending at a minimum and make sure that your spending serves a purpose and not just an ego boost. Don’t buy that luxury car that’ll cost you $2,000 to $3,000 per month on repayments or that new iPhone when your current one is working perfectly fine.
You know what’s costing a lot now, so start looking for cheaper substitutes or alternatives. For example, Nutrition Australia recommends that we shop seasonally. Locally grown, in-season produce will be much cheaper than alternatives. If you want specifics, Sustainable Table has outlined here which produce are in season when. For example, avocados are currently only $1 each in Coles and Woolies and they’re expected to remain relatively cheap for the foreseeable future, so start making some avocado toasts!
With fuel costs rising, maybe it’s time to dust off your bike for your shorter commutes. If you use your car for work, start using the cents/km method for calculating your income tax deductions for the 2022-23 FY, that’ll save you 78 cents/km, which will really add up.
The market price may be based on supply and demand but you are the one who has the final say on purchases. Start spending more purposefully, buy what you need but also keep a close eye out for better deals and spending alternatives.
Since the beginning, Tailored Accounts has always practised what we preach because how else can we ethically advise other businesses in good conscience.
Tailored Accounts started in 2008, right in the middle of the Global Financial Crisis. At that time, the interest rate was about 8-9% on a 12 months term deposit. We still remember advising one of our customers to lock in their deposits for 3 years before they started to decline.
One of the greatest tools we’d like to share with you is our cash flow model for managing current and future finances. Developed to fit different businesses in different industries, this cashflow model is called BIS – Business Intelligence System.
With BIS, our CFO is able to meet with our clients each week to go through all the assumptions we have for their finances and stress test their sensitivity. When Russia started the war in Ukraine, we made sure to have our customers review their current debt finances. We know that with inflation, interest rates will go up, so we needed to make budget adjustments to accommodate a high-interest economy.
Our BIS model also allows our CFO to use scenario analysis with CEOs to restructure staff salaries and wages. For example, an actual example we have from a client is that it would have cost them 20% extra to replace a role in their business, so we decided to look for alternative solutions and analyse their respective impact on the business. Instead of having one sales person, we proposed that the role be restructured– to have an outbound call centre take care of customer outreach and a part-time salesperson meet and pitch to customers. With the ability to compare the cost and benefits of these two options, our customer was able to confidently choose the second option, enabling them to maintain their previous cost while generating higher revenue.
We understand the stress that businesses must be in right now, to have just survived the pandemic only to be thrown into a financial crisis. Tailored Accounts is responsible for over 30 families. There are over 2,000 individuals, employees of our clients, that rely on us to process their pay each week. So hinging our future on a “what if” and “maybe” is a gamble that we refuse to take. We need certainty!
Our BIS model enables our CFO to accurately project future business financials, providing our clients with the ability to make the most informed decisions. If you’re driving a car under severe weather conditions, wouldn’t you want to turn on the radio so you can know where the storm is heading so you can steer away from it?
To conclude, I would like to acknowledge the hard work of both the Tailored Accounts staff and all the other accountants around the country. Let’s keep up the good work and continue to share our knowledge so people can make better choices in this difficult time!
Source: Harry Hoang | CEO of Tailored Accounts
Covid-related disruptions, the war in Ukraine, labour shortages, and a myriad of other issues have placed the global economy in a precarious position. With the Reserve Bank governor, predicting that inflation will reach 7% by the end of the year, it’s time to understand the ins and outs of inflation so you can start preparing your business.
Tough times favour sturdy business. When economies are running hot, they can accommodate weak businesses. In this survival of the fittest scenario, only well-managed businesses, offering good-value products and services will continue to attract customers.
