High inflation, rising rates the top challenges for FY23-24, says BDO

Businesses will continue to face difficult conditions throughout the 2023-34 financial year with the negative effects of higher inflation and rising interest rates diminishing the purchasing power of consumers and businesses, lowering standards of living and increasing economic uncertainty, says the mid-tier firm.

In its economic outlook, BDO said elevated inflation, poor wage growth and the rapidly tightening financial cycle are causing pain for many households, consumers, businesses, and impacting financial markets in Australia.

“High inflation has also made it harder for businesses to plan, with owners spending their time protecting organisations against inflation rather than investing in productivity improvements which has impacts on wage growth further down the line,” said BDO partners Ally Flint and Darren Black in the outlook.

“Many businesses are currently facing an extremely difficult environment with unique challenges depending on the industry sector they are in.”

Tech sector

The technology sector has been heavily impacted by post-pandemic inflation and rising interest rates.

“Large-scale digital transformation projects were some of the first to be put on hold by clients of tech businesses, as costs began to rise,” BDO said in the outlook.

“This has led to customer attraction difficulties as businesses have trimmed spending. Added to that has been staffing issues exacerbated by the tight labour market, in an industry where staff retention rates are typically low.”

An increase in skilled overseas migration may alleviate some of the labour market shortages for this sector in the coming year, said BDO.

Health sector

The health sector remains in a strong position despite economy uncertainty.

“However, healthcare organisations are struggling with the costs of doing business,” the outlook said.

Staffing challenges as well as inflation increasing prices are impacting all areas of the sector, which has led to higher healthcare costs for patients.

BDO said healthcare organisations will need to focus on cash flows to ensure profitability and sustainability.

“Businesses in the sector can increase scrutiny of financial data to highlight areas of weakness and opportunity to remain profitable. Leveraging technology is also a mechanism to improve efficiency and levels of productivity,” the accounting firm said.

“This includes automating systems and adopting med-tech innovations such as telehealth or newer health devices to support patients and expand business.”

Construction

The construction sector has faced considerable stress in the past 18 months, driven by the increased cost and limited availability of materials.

“Fixed price contracts have worked against the industry, which has experienced a record number of insolvencies, impacting both consumers and the broader market,” the outlook said.

“Productivity in the sector has been an ongoing issue, which is lower than it was in the 1990s. The industry sector is also facing record labour market shortages.”

“Organisations in the sector will need to assess how they approach fixed price contracts going forward, as these may expose businesses to unacceptable levels of risk in terms of costs. For businesses seeking to become more sustainable, there are several financial incentives that can be leveraged.”

Real estate

Rising interest rates have increased the fear of the housing bubble bursting.

“The current housing market is facing uncertainty, particularly for people on fixed rate mortgages and renters. According to some surveys, nearly half of Australians have lost the motivation to save, invest or increase their income and there has been a marked impact on household savings which were accumulated during the pandemic,” BDO said.

The accounting firm expects there will be at least to more increases in the cash rate which will further influence the housing market.

Family-owned SMEs

Family-owned organisations and small businesses in Australia are facing difficult situations as they try to balance rising expenses with the need to retain customers.

“Customers are diverting their spending away from non-essential goods and services to cover the increasing cost of living leading to a decline in demand for discretionary goods,” said BDO.

“As a result, small business owners are finding themselves in a difficult position, with a need to increase prices to cover rising costs, while avoiding driving customers away.”

Inflation can have a profound effect on small businesses, influencing their decision making in numerous ways.

“To mitigate risks and challenges, small business owners may opt to cut back on certain expenses which can include delaying new product launches, cutting back on marketing spend, repairing equipment rather than investing in replacing and terminating certain product or service offerings that are no longer being purchased,” BDO said.

SMEs may also want to consider cutting travel expenses and switching to more cost-effective materials.

“The willingness to take on financial risk may be reduced as small business owners generally focus on weathering inflationary storms and trying to maintain profitability,” BDO said.

“To remain competitive in the market, family-owned organisations that embrace technological advice advancements and invest in digital transformation are well placed to adopt information to better their business processes.”