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Inflation fear: More SME owners willing to take a pay cut to keep their biz alive

Frustration, annoyance, and anxiety. These are just a few of the sentiments that small business owners have as the inflation rate climbs beyond double-digit percentage levels. 

According to a survey of 253 Australian SME owners conducted by an independent panel for Small Business Loans Australia, 85 per cent of companies will make difficult decisions to get through a difficult financial year. 

In particular, 40 per cent of business owners stated that they would lower their own salaries: 45 per cent of microbusiness owners (1–10 employees) would do so compared to 31 per cent of small business owners (11–50 employees) and 27 per cent of medium-sized business owners (27 per cent).

Some participants propose to raise available funds to resolve their existing liabilities: 10 per cent will refinance or find ways to pay off their debts quickly, and an additional eight (8) per cent of respondents will seek financing to help the business through the tough period. 

The big picture

Earlier, we reported that Australians are getting ready to dramatically cut the frequency of their visits to restaurants, pubs, and cafés, as well as the amount of money they spend there, according to new research by SevenRooms

Inflation fear: More SME owners willing to take a pay cut to keep their biz alive
Responses to biggest challenges SMEs anticipate in FY 23. Via: Small Business Loans Australia

A very rigorous fiscal year is anticipated for Australian businesses, which are already feeling the strains of a competitive labour market, capacity limitations, stricter lending standards, and supply chain disruptions. Business exit rates in Australia reached about 4 per cent in March 2022 because of expectations that inflation and interest rates would continue to rise.

The ‘Cost of Living’ research found that as much as 30 per cent of hospitality spending could be lost over the coming months. In addition, 82 per cent of Australians believe the present cost-of-living crisis has already affected their spending patterns, and another 13 per cent think it will do so in the near future. 

The target of their budget cuts will be the hospitality industry in particular. Three-quarters (78 per cent) of Australians will visit restaurants, cafes, and bars less -and 79 per cent said they’d spend less when they do see – due to the cost-of-living pressure.

Rising wages

The wage price index in Australia has risen at the quickest rate in over eight years, but it still lags behind the country’s headline inflation rate. Wages rose 0.7 per cent in the last three months to 2.6 per cent, according to Australian Bureau of Statistics statistics issued Wednesday.

While much below the inflation rate of 6.1 per cent and economist projections of a 2.7 per cent annual increase, this is Australia’s greatest wage growth rate since September 2014.

Bigger challenges for FY23

The major challenges that respondents might encounter in FY23 were asked to be identified. Just 10 per cent of respondents said they would not suffer any obstacles through FY23, while 90 per cent of respondents said they expect their business to endure difficulties. 

Fast-rising inflation was cited as the greatest difficulty by forty-two (42) per cent of respondents, while 41 per cent cited RBA rate increases and decreased consumer or client expenditure as their top worries.

Other challenges SME owners expect to face in FY23 included fast-rising interest rates (chosen by 28 per cent of respondents); having to pay higher wages on the back of the minimum wage increase and employee wage expectations (chosen by 22 per cent); the inability to fill roles in the business due to candidate shortages (19 per cent); and accessing financing or servicing loans and other debts (11 per cent).

Meanwhile, larger SMEs were more likely to identify significant challenges for FY23. Fifty-one (51) per cent of medium-sized businesses (51-200 employees) indicated that fast-rising inflation was their biggest challenge, compared with 41 per cent of small businesses (11- 50 employees) and 40 per cent of micro-businesses (1-10 employees).

Paying higher wages on the back of the minimum wage increase was also identified as a major challenge for medium-sized businesses, at 46 per cent. In contrast, 35 per cent of small businesses and just 13 per cent of micro-businesses said the same. This is likely because medium businesses have a higher headcount compared with micro- businesses that operate with just a few staff. Larger businesses also navigate higher overheads and other costs that are likely steadily increasing in price due to inflation.

Forty (40) per cent of medium-sized businesses also identified fast-rising interest rates as a significant challenge, compared with 37 per cent of small businesses and 23 per cent of micro-businesses.

Inflation fear: More SME owners willing to take a pay cut to keep their biz alive
Via Small Business Loans Australia

Alon Rajic, founder and CEO of Small Business Loans Australia, says: “Our research suggests that small business owners will do everything they can to minimise the impact of fast-growing inflation and interest rates on their business, including cutting costs and even underpaying themselves. They will aim to avoid incurring larger businesses’ debts while rates are still rising, directly impacting their investment spending. 

However, businesses know recessions usually don’t last long, so thankfully, letting go of their employees seems to be a last resort, and only if needed.”

Alon says: “Our results suggest that inflation and a potential recession will have a bigger impact on the SME sector than the 5.2 per cent increase to the national minimum wage and a shortage of workers. Despite a 10 per cent decrease in the number of unemployed people in June this year, price hikes and reduced consumer spending come out on top as the biggest obstacle with almost half of Australian businesses fearing future struggles with loan repayments and debt.” 

One in 10 (10 per cent) of respondents said they would refinance their current loans to get a better deal, and 8 per cent said they would get financing. Alon says, “Looking for the right loan product in the current environment of rising interest rates and a plethora of loan options can be overwhelming for small businesses. 

“Comparison websites are one of the easiest ways to shop around –particularly ones that specialise in business lending. In addition to interest rates, consider fees, charges and any options that give you flexibility in paying down your loan.”

The full survey results, including breakdowns across ages and States, can be found here: smallbusinessloansaustralia.com/resources/australian-smes-2023.html

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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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