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Credit: Keenan Constance

The pricey pitfalls SMEs should avoid

Despite experiencing several interest rate hikes in the past few months, only 27 per cent of Australian SMEs remain optimistic about Australia’s ability to evade an impending recession. 

To prepare for the possibility of declining consumer demand due to additional rate hikes, a significant number of SMEs are actively monitoring and minimising their expenditures.

Interestingly, a remarkable 86 per cent of Australian SMEs have realised that they are overspending in at least one expense category while striving to reduce unnecessary costs. This overspending has a detrimental effect on their overall financial performance.

In light of an uncertain economic outlook for Australia, Alon Rajic, Founder of Small Business Loans (smallbusinessloansaustralia.com ), encourages SMEs to be disciplined with their business expenses this year: “With SMEs making up 97 per cent of the Australian business market, the fact that research is showing so many are failing to shop around for better deals on their business expenses is a cause for concern. This is a time when businesses should be forensically monitoring their outgoings and reviewing overpriced suppliers.”

Alon sheds light on various areas that business owners and senior decision-makers often overlook when attempting to control business expenses:

Limited loan options

A significant number of Australian SMEs (64 per cent) rely solely on the big four banks for loans and hesitate to explore alternative lenders, potentially hindering their business growth. Microbusinesses (70 per cent) and small businesses (46 per cent) are particularly hesitant to consider better rates offered by other lenders. Even large businesses (59 per cent) continue to opt for bank loans with interest rates of up to 10 per cent.

As interest rates continue to rise rapidly, SMEs should use comparison services to seek the best rates rather than completely abstaining from borrowing. 

(Read the full study here: https://smallbusinessloansaustralia.com/sme-big-bank/).

Unnecessary overspending 

A study reveals that a significant portion (32 per cent) of businesses could save at least $100,000 annually by reviewing their expenses and reducing unnecessary costs. Furthermore, one-fifth (21 per cent) could save over $200,000 annually by simply avoiding unnecessary spending. 

Businesses tend to spend less on payroll, IT, marketing, insurance, travel, loans, vehicles, utilities, equipment, and rent. Many businesses admit to paying too much for insurance (28 per cent), utilities (26 per cent), rent, or commercial property loans (20 per cent).

Taking measures like downsizing workplaces, adopting hybrid working arrangements, switching insurers and utility providers, and refinancing business loans can significantly change annual spending. 

(Read the full study here: https://smallbusinessloansaustralia.com/areas-of-overspending/)

Lack of late payment resolution plan

Late customer payments can severely impact small businesses, impeding their ability to pay suppliers, staff salaries, and loans. Research indicates that 64 percent of Australian SMEs were negatively affected by late payments in 2022. As costs of business expenses rise, including goods, utilities, rent, and fuel, this situation is expected to worsen in the upcoming financial year. SME owners can avoid or better manage overdue payments by utilizing debt-collecting apps, implementing early payment incentive systems, or offering alternative payment methods. 

(See full study results here: https://smallbusinessloansaustralia.com/late-customer-payments/)

Overemphasising new customer acquisition

Businesses should prioritise retaining existing customers instead of solely focusing on acquiring new customers. Recent data reveals a decline in retail volumes over two consecutive quarters, making customer retention even more crucial. Acquiring a new customer can cost five times more than retaining an existing one, a significant expense during a time when consumer spending is decreasing. Nurturing relationships, addressing customer feedback, providing excellent customer service, and rewarding loyalty can help businesses retain customers and reduce the cost burden of acquiring new ones.

Neglecting employee retention

With Australia’s low unemployment rate and limited immigration in recent years, businesses face a scarcity of talent and substantial costs associated with replacing employees. It can cost 1.5 times an employee’s annual salary to replace them. To overcome this challenge, businesses should focus on engaging, rewarding, and motivating employees, offering development opportunities, and providing competitive salaries and benefits packages.

Inadequate technology and digitisation

Many SMEs (59 per cent) continue to rely on manual processes that could be digitised. Businesses need to utilise labour-saving technology and digitisation to avoid incurring higher costs by relying on human resources for service delivery and operations. Implementing technology and digital platforms can streamline workflows, improve efficiency, provide valuable data insights for better decision-making, enhance the customer experience, and stay ahead of competitors.

Ignoring rates and fees on overseas payments

Surprisingly, more than a third of businesses (36 per cent) need to check exchange rates and associated fees before making overseas payments, resulting in potentially high wire fees of up to $40 through banks. Small and micro businesses are particularly guilty, with 44 per cent of small-business owners and 35 per cent admitting to never comparing providers. 

SMEs can save hundreds of dollars on unexpected exchange rate fees by conducting due diligence and comparing providers. 

(Read the full study here: https://moneytransfercomparison.com/australian-business-exchange-rates/).

Addressing these overlooked areas can significantly impact a business’s financial health, growth potential, and long-term sustainability.

By exploring alternative loan options, reducing unnecessary expenses, implementing strategies to manage late payments, prioritising customer retention, focusing on employee retention, embracing technology and digitisation, and being diligent in international payments, Australian SMEs can enhance their financial resilience and maximise their chances of success in a challenging economic landscape.

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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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