Should you raise your prices to keep up with inflation?

I was in a retail store the other day and was surprised to see a notice taped to the counter. It said: “We are proud that we haven’t raised our prices, even in light of current events.”

While this is a lovely sentiment, my immediate concern was whether the business owners had thought it through and if their profit model was sustainable. As a customer, I obviously don’t want to see a price increase – but I would be more upset if the business is not around in 6 months time! 

There is no denying business owners are facing tough times right now. While the lockdowns of previous years had their challenges, today’s challenges are even more concerning for many.

The rising cost of goods and services means businesses are paying more for supply, more for energy, and much more for fuel. Labour shortages and the increased superannuation guarantee mean they’re paying more for staff, and rising interest rates could mean they’re paying more to service business loans.

Looming tax debt recovery action

In addition to economic challenges, it’s now well understood by most business owners that the ATO’s period of leniency during COVID has ended. This means the ATO is proactively pursuing overdue tax debt – be it through warning letters, director penalty notices (DPNs), or even applications to wind up a company.

More than 700,000 warning letters were recently sent out, targeting companies with over $100,000 in tax debt that is more than 90 days past due, as well as to those with overdue superannuation guarantee amounts. This is set to be followed by disclosure of debt to credit reporting agencies, and DPNs being issued to directors who don’t respond. Unfortunately when it gets to this stage, the option to work out a payment plan is gone.

If you have overdue tax debt, don’t ignore it. Interest and penalties on overdue payments (i.e.: where there is no payment arrangement in place) will keep accumulating and could become very significant. Instead, engage with the ATO or ask your accountant to act as a mediator on your behalf. Look for an acceptable payment solution that will effectively pay down your debt without putting extreme pressure on your cashflow.

Finding ways to cut costs and boost cashflow

The current landscape makes it more important than ever for business owners to step back and evaluate their business holistically.

Look for opportunities to cut unnecessary costs, such as by:

• evaluating new suppliers
• moving to a smaller office space
• changing loan providers
• leveraging technology to be more efficient

Inefficiencies can be a huge drain on a business and its resources.

Having a skilled third party conduct an internal audit is often very valuable in pinpointing areas to improve and save money – even if it’s as simple as deploying a relatively inexpensive new software platform to streamline operations and reduce administrative burden. 

Letting go of staff when finances are tight is never a preferred option as it can be difficult and costly to onboard new ones if business demand grows. However, you should be prepared and have benchmarks in place so you know what action to take and when. Scenario planning and forecasting is the best way to do this, and your accountant or business adviser should be able to assist. 

Lastly, there will almost certainly come a time (or several times) where you need to raise your prices. No business wants to lose customers, but you need to ensure that you will have a business at the end of the day.

The current situation does not appear to be short term, so try to make clever and informed decisions that factor in the best interests of your staff, customers and business. Set time aside regularly to do a health check of your business, including:

• cashflow
• products and services
• profitability
• pricing

At RSM, our accountants and business advisers are always available to help and can provide a free health check so you can get a true picture of how your business is performing. 
We can also work with you to evaluate debt, assess inefficiencies and opportunities, and run a variety of scenarios to assist with risk mitigation and planning for the future.

For further information when deciding if your business needs to raise your prices, please have a chat to a expert.

To speak with an RSM advisor regarding your agreements, please contact your local RSM office.