How to survive interest rate fluctuations

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Businesses don’t plan to fail they simply fail to planDave Naylor

Small Business form the foundation of our economy  and indeed the country, with such a high failure rate (statistics  say only 4 % of small business survive beyond  the critical 10 year period)  it is critical that those  business owners, CEOs,   or management  Boards place  the appropriate emphasis  on  planning. Planning assists with management through the uncertainties of the economy including fluctuations in interest rates and outlines how this fluctuation will impact on their business, says David Naylor co Author of Small to Great “how to turn your small business into a great business”. David Naylor along with Ed Chan are founding partners of the National Accounting group Chan and Naylor specialising in Property , small Business and SMSF.

Unfortunately many business owners are so busy doing whatever it is they do and get so caught up attending to the day to day functions of the business they neglect the very important task of planning. As part of the planning process you determine what the opportunities’ and threats are to your business   and how to manage the associated risks, this  prepares the business for the uncertainties  including fluctuations in profits and cash flows due to  changes in the economic environment one of which is caused by fluctuations in interest rates.

“Business owners must be prepared for the impact to their respective businesses due to rising or in fact declining interest rates”, says Naylor over a business cycle the business will experience both the ups and downs of interest rates fluctuations and must proactively plan well in advance for these.

But what is the impact of Interest rate fluctuations on business?,

“I prefer the Gerry Harvey and John singleton view on economics Keep it simple, Whilst economists will analysis statistics, make predictions based on Inflation rates and GDP and other data says and various trend lines etc I would prefer to talk in language that business owners understand and it is not that complicated, the bottom line is that changes in interest rates impact on every business’ says Naylor.

It is not difficult  to work out that in a rising and higher interest rate environment you will see less willingness from  people to spend their hard earned money mainly because basically they have less of it ,but also due to  lack of confidence and uncertainty, for a business this generally means  a decline in sales and a reduction in profit margins says Naylor, therefore it would be prudent to keep your eye on your budgets , cashflows and other financial data of the business so that you can react quickly to a decline in sales and profits, and take the appropriate steps by either reducing overheads or seek short term finance  from your banker to assist you through the tough times, this is  evident today, consumers are hesitant to spend money due to the uncertainty and  threat of rising interest rates, the retail sector is a classic example and where we  have seen recent declines in Profit margins and sales, many are finding it difficult to maintain sales in this environment in fact recent data shows that Australians are saving more of their money than ever before,. By management receiving the appropriate timely reports including KPIs and financial indicators enables them to make quick decisions; this is vital for the survival of your Business and may mean the difference between success or failure.

Related:  Ask the Experts October 2015 (Featuring Ken Raiss)

Higher Interest rates have an effect on all businesses either directly in the form of higher direct costs if carrying a debt which reduces profit margins or lower sales and profit margins due to reasons above. In a high interest rate environment’s   Businesses are less likely to reinvest and expand through borrowings and invest into capital such as Plant and equipment .Infrastructure projects are put on hold and it is highly unlikely the business will increase fixed costs such as labour in fact there is more a likelihood of a reduction in staff levels to maintain profit margins and satisfy shareholders….which in turn has an impact on the overall confidence of people. Just ask yourself this question If my Job is not guaranteed am I likely to go out and buy that new lounge, or car or borrow to buy a new property…I think you know the  answer to that …its that simple.

Although all businesses are impacted by rate rises certain industries are affected more than others, Industries associated with property such as Real estate agents, builders and developers, Finance brokers are significantly impacted in high interest rate cycles and there is a knock on effect to associated industries.

Conversely when rates are low Businesses need to be in a position  to obtain finance so as  to reinvest for future growth  and also ensure that part of the profits are squirreled away into reserves  to manage future fluctuations.

Throughout a business life cycle you will experience Interest rate fluctuations   Naylor says,   you must understand the industry you are in and the impact that these interest rate fluctuations will have on your business and industry, planning and monitoring is the key Naylor say, as sure as Night follows day Interest rates will go up and down so plan, manage, monitor, and react quickly to ensure your business is in the best position to survive and thrive during these cycles

Related:  Work Like Warren Buffett


David Naylor


Non Executive Director

Chan and Naylor

Co-Author small to great “how to turn your small business into a great business”


Important notice and general advice warning:

This information is of a general nature only and is not intended to represent investment or professional advice. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A Product Disclosure Statement (PDS) for the products mentioned in this communication should also be obtained and you should consider the PDS in deciding whether to acquire, or to continue to hold, any investment.

The information contained in this document is given in good faith and is believed to be correct at the time of publication, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omission (including responsibility to any person by reason of negligence) is accepted by Chan & Naylor Pty Ltd, its officers, employees, directors and agents.


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