The Reserve Bank of Australia’s (RBA) interest rate cut last month no doubt brought a big sigh of relief for Australia’s 2.7 million small businesses.
The question on everyone’s mind is whether this a sign of things to come, as we know this is not an instant fix. It’s easy to assume that any rate cut will encourage people to spend more — both consumers and small businesses alike, as the cost of borrowing decreases. But the reality is, it can take time to see any benefit to a small business’s bottom line — we’re talking up to 18 months to two years to fully flow through the whole economy.
So, what does this all mean for your small business right now, what actionable steps can you take to position your business to thrive? Let’s dive in so you can proactively navigate the direct and indirect impacts on your small business.
How the rate cut affects everyone around you
Your cost base — with lower inflation and borrowing costs — doesn’t necessarily mean lower prices. Your costs are still higher than they used to be, even if they’re not climbing as fast as they were.
The recent rate cut means the RBA feels more confident that inflation is sustainably returning to its 1-3% target range. This is good news — but, as inflation moves back toward that range, it doesn’t mean prices will fall or return to where they were before inflation spiked back in 2022. It just means prices are rising slower than they were during the recent inflation crisis.
So, what does this mean for your customers, suppliers and competitors?
Your customers will hopefully have more money available for discretionary spending. As a small business owner, you are also a consumer — so you too can appreciate that they will be judicious where this additional money will go and what it is used for. To build a strong relationship with your customer base at this time, it’s important to remind them of the unique value you can offer and to understand how they prefer to pay. Recent research from Xero’s ‘I want to pay that way’ report revealed 38% of customers get frustrated when they can’t pay with their preferred payment method and will take their business elsewhere. Additionally, almost a quarter (23%) of Australian consumers are using services like Aerpay and Klarna to take advantage of flexible payment options that, in some instances, better suit their needs.
Oen, your suppliers are also small businesses, so as they hopefully see their borrowing costs decrease, this is a good time to discuss improved rates and payment terms with them. Like you, they aren’t seeing the full impact today, so you might also want to discuss how you can do more frequent reviews of these terms.
Your competitors will see the same benefits, and some, especially if they are larger, will use this to their advantage to potentially compete on price.
Our recommendation is similar to the advice we give small businesses during sales events like ‘Black Friday’— focus on differentiation, such as through your business’s unique proposition or with personalised service. With lower borrowing costs, it might be the time to invest in upskilling yourself and your team, hiring more staff and investing in new technology that will help improve productivity and provide a longer term cost advantage — giving you a more sustainable way to grow and compete.
What can you do today to lay the foundations for success?
Cash is king — are you getting it in your bank account as fast as you can?
One of the most effective ways to ensure healthy cash flow is by getting paid faster. Digital invoicing tools that make it easier for your customers to pay straight away with their preferred payment method, such as the ‘Pay Now’ button in Xero, can help you get paid twice as fast.
Recent data from Xero’s Small Business Insights found that small businesses are currently being paid an average of six days late, and that late payments cost Aussie small businesses $2.7 billion in 2023. This impacts your ability to cover operating costs, pay suppliers or staff, or invest in future growth.
Once you know you are getting cash in as fast as possible — look at how your cash flow changes over time, as the timing of this in relation to when you incur expenses is another critical thing to get on top of. Using cashflow forecasting tools, like those in Xero, a third-party app or even in a spreadsheet, will help you to have a full picture of your cash flow and plan for longer term investments that might drive growth, improve productivity and give you more time back to do what you love.
Work with your trusted advisor
If you have one, make sure you lean on your accountant or bookkeeper to help guide you through these changes. A trusted advisor can make it easier to navigate financial decisions, adopt new technology and find ways to reduce cost and wasted time. Engaging with someone that has been through this before to review your business plan and forecasts will ensure you’re making the most of every opportunity, whether it’s better managing your cash flow or taking full advantage of new tax breaks.
Don’t wait, and take control now
Ultimately, the RBA’s interest rate cut has its benefits, but they still take time for you to see them in full. So, put yourself in the best position to thrive when the positive effects take hold and don’t wait. Now is the time to turn your attention to finding ways to get paid faster, forecast what the next 6-12 months may look like so you can better negotiate payment terms with your suppliers and invest to attract more customers — all of which will give you back more time, or in the long term, reduce your costs. The key is to remain proactive and prepared to adapt to the changing economic landscape
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The RBA’s rate cut offers relief, but don’t wait for benefits. Learn how to navigate this shift for lasting success. Expert, News, Rba Dynamic Business