Inflation’s impacts have been catastrophic for some small businesses, says Craig Hudson, managing director for Xero New Zealand and the Pacific Islands.
Aotearoa is a nation of small businesses, with about 530,000 – or 97% – employing fewer than 20 employees. New Zealand also has the highest proportion of sole traders in the world.
But wage inflation, raw material costs and higher debt interest rates have hit these small businesses with a triple whammy many are finding hard to absorb, says Hudson.
“Our Xero Small Business Insights data showed wage inflation was up 4.8% year-on-year, which is a big change.
"Not only are you trying to retain the talent you've got but you're also having to meet market expectations of new people,” says Hudson.
“And then potentially you've got a wage discrepancy between someone that's been with you for a while and a new employee.”
Hudson says the ability to run a business is predominantly driven by people. “As borders reopen, I think the No.1 thing small businesses are going to struggle with is getting access to talent and retaining that talent.”
Secondly, raw material costs are rising across most sectors, including in construction, where supply chain issues are causing not only cost inflation but also lead-time blowouts.
“Effectively, it means as a business owner or manager, you're working longer hours, and you're taking less home because there's less profit.”
Thirdly, accounting partners are telling Xero that debt levels within small businesses are creeping up, Hudson says.
“So, not only do they potentially not have enough buffer to be able to get through, but it also means with inflationary costs coming through the next one to two years, there is going to be a lack of ability to invest in new things,” says Hudson.
R&D will suffer
Xero predicts one of the first areas to be trimmed will be R&D, or innovation.
“If we're not able to invest in innovation, then you're effectively doing the same stuff in the same markets, when everything's moved on.”
The best way to combat challenges posed by a high inflation environment is to have real-time data, Hudson says. The more business owners can understand immediate impacts on their businesses, the more accurately they can respond.
“Do you know what's happening within your customer base? Who are your loyal customers? What are your supply chain risks? If you're trying to put a finger in the air and guess based on gut, unfortunately, it's not good enough any more,” Hudson says.
He recommends getting support, testing different views, and avoiding going it alone.
Business owners and managers can do this by connecting more closely with accounting, book-keeping and digitisation professionals, by investing in training, and by connecting with the likes of the local chamber of commerce to get advice and different views.
Small businesses could offset supply chain risks by seeking new alternative supply chains, or making bulk purchases in advance of demand for key products or materials and warehousing them, Hudson says.
Cafes and costs
They could find new ways to build in profit day-to-day. Take the cafe faced with rising coffee prices.
Rather than respond directly to the problem by putting up the price of coffee to $7, which could drive customers down the road, cafe owners could think outside the square and put up the price of other items to recoup the higher costs of roasted coffee beans.
Hudson says small businesses, as the backbone of the New Zealand economy, should be helped and supported, rather than left to try to survive alone.
“Policy-wise, what can we be doing to get our businesses through the next couple of years, when hopefully we’ll have a better steer on what the future holds? We need to ensure we’re still investing in the future.”
NZIER principal economist Michael Bealing agrees R&D is likely to be first affected by pressure on small businesses.
He says rising fuel costs are hitting most industries hard, and higher food and ingredients are affecting hospitality, in particular.
Small businesses will be forced to pass on higher costs to their customers and are likely to encounter a dip in demand as a result.
Marketing is particularly important in this environment, to ensure businesses remain top of mind for customers.
“I think your customers are going to be your biggest fans, and they want to make sure that you survive.”
For example, as the cost of groceries rises, household spending on dining out or takeaways will dip.
“But it's about building a relationship with customers, so when they do go out and spend, they come to your business instead of elsewhere, and then they buy the extra coffee, that extra glass of wine or they order dessert because they want to support you.”
Communication, says Bealing, will be key to riding an inflationary environment.
Businesses need to talk to suppliers and distributors to get advance warning of changes that will have an impact on their costs.
They need to speak to their staff to ensure teams understand pressures facing the businesses. And, in turn, they need to let customers know of upcoming price changes.
“We all need to be clear and transparent.”