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Here are our top tips on protecting you and/or your business against inflation.

➡️ If you’re self-employed, you may be entitled to a tax deduction as a result of working from home.

If you’re a renter, you can generally claim a % of your rent as a tax deduction. Similarly, if you’re paying off a mortgage, you may be able to claim a % of your mortgage interest as a deduction. If you’re not taking advantage of this deduction opportunity and you think that it may apply to you, click here for more information, or get in touch with our team.

➡️ If you’re paying off a mortgage, it may be feasible to consider moving out of your main residence, renting a property to live in, and renting your own home out to tenants.

What this means is that you are essentially converting your personal, non-deductible debt into deductible debt in the form of an investment. While this decision will involve carefully balancing a number of considerations including capital gains tax and the 6-year rule; it could definitely improve your cash flow and financial position overall.

➡️ Review your cost of sales.

You’d be surprised at how quickly your direct costs of sale can sneak up on you. Perhaps your purchase price remains the same, but your transportation costs have increased. Your staff may not have been given a pay rise, however, the super guarantee rate has now gone from 10% – 10.5%. Similarly, other employment costs such as WorkCover insurance are on the rise. Ultimately, you can’t properly set your price and review your ongoing business viability unless you have a very clear grasp of exactly what your direct costs are – and where these are likely headed.

➡️ Understand your gross profit margin.

“Cash is king!” The gross profit margin is arguably the most important financial ratio as it’s crucial in calculating your business’s forecasted cash flow. As mentioned above, the effects of inflation can be discreet and known to sneak up on business owners. By way of an example, a supplier may increase a product that you purchase for resale from $3.10 to $3.33. The business owner notices, but then thinks “it’s only 23c”. Say nine months later, the price is increased again from $3.33 to $3.66, with the supplier citing “disruptions in their supply chain”. Again, this 33c increase may not seem like much, however now this product has actually increased by over 18% in less than 12 months! That’s over double the rate that the RBS announced of 7.8%. It’s not uncommon for businesses to take advantage of an inflationary environment to sneak in a price increase to boost their profit margins, so- it may be time for you to consider doing the same. Ultimately, if you understand your gross margin, then you can accurately determine the level of sales required to cover your fixed costs and break even. Furthermore, you can determine the price point needed to achieve your desired gross profit margin.

➡️ Review your fixed costs.

These are your costs that don’t directly increase along with your sales. These include rent and all your monthly direct debit subscriptions. Are there any you can scrap without compromising business quality? Perhaps there is a cheaper way of obtaining the same result. Be careful that you only consider reducing / dropping costs in cases where these decisions hurt your business down the track eg – using a cheaper bookkeeper now could cost you down the line in the form of accounting fees to fix mistakes.

➡️ While raising prices isn’t always a desired option (as a result of potential pushback or resistance), it’s arguably the area you have the most control over.

Here are some aspects to consider:

How long has it been since I’ve increased my prices?
How long until it would be acceptable for me to increase them again?
What are my competitors charging?
What is the likeliness of an increase in competitors?
How will my clients/customers react?
Is the increase substantial?
Is there more value that could be provided to make the increase in price more palatable?
Are my fixed or variable costs likely to increase materially anytime soon? That is, are there any upcoming pay increases due that should be factored in? Is your lease about to end and likely to be increased? Are your material, input costs, or goods for resale about to increase?
What is the best method to communicate the price increase? Phone call? Email? Website?
When is the most appropriate time to introduce the increase
What reason would be provided to justify the price increase? Communication and transparency are key!!
Avoid turning off customers with dramatic across-the-board price increases.
Raise prices slowly in modest increments and be strategic.
Choose areas where customers are less likely to notice a price increase.

➡️ If you would prefer to avoid an increase in your pricing, and if your costs are relatively set, then you should instead consider increasing the volume/level of your sales.

Aspects to consider:

Can you scale up production?
Is there technology that could assist in increasing efficiency
Are our staff adequately trained?
We can review our procedures and consider whether it’s the most efficient process and if not, consider implementing change.
Is there more readily available staff?
How long does it take to train a new staff member to an efficient level?
Services – Can we train our clients to assist us in a new procedure that makes the process more efficient?
Products – Similarly, can we source more or larger volumes from other suppliers?
Ask your staff for their thoughts on this topic.

➡️ Reducing costs is usually a good thing, and often comes with more favourable climate outcomes.

However, as touched on above, you need to be mindful of sacrificing quality over lowering your costs. Things to consider:

Can you downsize your business premises?
Is your business paying for products or services (subscriptions) that aren’t being used?
Consider viable substitutes & seek alternative products/ingredients that will save you money.
Consider lower labour costs such as offshore staff/contractors, or even contractors on-shore so that you don’t have to commit to employee entitlements and an ongoing contract.
Review entitlements to any government rebate for certain costs.
Are there other ways to remunerate staff, such as employee options, which are essentially shares provided to them in the future, usually based on some contingencies?
Review insurance policies and their level of excess. Increasing excess can be a good way to cut the premiums down substantially.
Consider selling any equipment that’s no longer required.
Is the installation of solar possible?
Retain staff – it’s often overlooked that new staff usually take quite some time to train to an adequate level and so that they’re familiar with your clients/customers.
Improve staff morale as it would usually lead to an increase in efficiency.
Ask for discounts on expenses, or if not, can we prepay costs now to get a discount?
Reduce unnecessary costs such as travel costs, entertainment, etc.
Freeze new hires and/or pay increases (but only if it won’t lead to resentment and future productivity issues.
Review and revise procedures, if there are more efficient methods.
Lower wastage of product.

Financial durability in an inflationary economic environment requires a careful review of a wide variety of factors. Should you require assistance in determining the best options for your personal situation or business, don’t hesitate to get in touch with our team.