| Become Interest Proof From Rate Rises |
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For Bob Hawke, it is one of the great regrets of his prime ministership - surpassed only by his pledge that by 1990 no Australian child will live in poverty. For businesses and the mortgage belt, the memory is of a major disaster that drove businesses to the wall and cost families their homes. The subject: interest rates that peaked at 17 per cent in 1989, tipping many companies and home owners over the edge. With interest rates likely to rise over the next couple of years, the fear of cost blowouts in businesses and households is real. Any business that went through the early '90s will always live in fear of interest rate rises, everybody remembers what happened when interest rates went through the roof and banks pulled the rug out from under people. Businesses should factor in a "sensitivity analysis" when borrowing to avoid capital repayment woes. Economic forecaster BIS Schrapnel has warned that interest rates could jump substantially in the next three years. In its latest Long-Term Forecasts 2004 to 2019 report, BIS Shrapnel says it is folly to think that Australia's moderate growth, low inflation and low interest rates can continue unchecked. It expects the official cash rate to peak at about 8 percent in late 2006. Despite the bleak assessment, Matthew Hassan, Senior Economist at BIS Schrapnel, is confident that most businesses are well placed to handle a rate rise. The real pressure, he says, is on home owners. "They've been the ones that have been borrowing hand over fist and will really feel each rate rise, "he says. "In contrast, Australian businesses have been paying down debt for six or seven years, longer even. They are flush with profits." However, some SMEs might feel the heat in a climate of higher interest rates. SMEs have been doing it a lot tougher over the last five or six years than the bigger companies. There are some safeguards for businesses to consider. The most logical is to consider fixing interest rates. If you do have an exposure that could become a real cash flow problem once interest rates start to rise, that's one obvious thing to be thinking about. Apart from that, the more important thing is to be aware of the cycle - that we are coming into a cyclical phase rather than a nice period of moderate growth and low inflation. Most at risk are new businesses that do not remember the horror stories of the late 1980s when borrowers were fixing rates at about 12 per cent. Rates have been so slow that people have said 'No, I'll run the gauntlet with variable rates'. They're not used to being caught short like in the '80s. Businesses should tap into the resources of financial institutions. Transferring some variable debt into fixed debt is logical in the current climate. It's like hedging for foreign exchange. Having a good work management strategy, is critical. A recent CPA Australia small business survey revealed that 50 per cent felt a rise in rates would be a negative but only 30 per cent had a strategy to combat hikes. More alarming, 45 per cent said they would not do anything at all. The most common response by about a quarter (of businesses), was that they would increase prices. However this may not be the most prudent strategy from a timing viewpoint. Expanding businesses with large outgoings of cash are particularly vulnerable to rate rises, while SMEs that are merely focused on day-to-day business operations are often equally unprepared. SMEs need to stay focused on the long term goals of the business, and the principles and procedures put in place to achieve these. SMEs should constantly review their day-to-day operations to ensure that the systems put in place are working toward the overall goals of the business. If interest rate increases are impacting the business, then changes should be made to reflect revised forecasts. It is very important that no SMEs rely on a management system that cannot focus on the future, as it is always looking behind. Among the measures businesses should be taking to soften the blow of rate hikes are:
One of the things that small and medium businesses do quite badly is inventory management and when you think of the amount of capital tied up in it, it's given far too little concentration.
Tony Martin - Director
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+ 61 8 8333 1944
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