Some years ago in my motorbike riding days, I recall a friend whose wife encouraged him to give up smoking on the basis that he could do whatever he liked with the money. In a short space of time, he bought himself a motorbike. The money he saved paid for all the running costs, including updating to the latest model every couple of years, as well as buying a collectors car. It was a great learning experience in terms of life and business skills that even small changes can give large and noticeable improvements. Why is this relevant today?
There is a lot of talk about cost of living pressures and the need for pay increases. I have no doubt that true inflation is much higher than the official one, probably above 10%, and likely to continue to increase in the foreseeable future. The problem is, pay increases will help further drive up the prices of everything, leading to an upward spiral of increasing costs, feeding on itself.
Talking to a friend recently who had a relative who is heading towards bankruptcy, but in a “keeping up with the Jones’s” attitude had recently bought a new dual cab ute (on finance), eats out regularly and had other less than essential spending traits. We all know people who live in McMansions, often as their first house, whereas previous generations started small and traded their way up. Anyone who has taken out their first loan in the last 14 years has never experienced an interest rate increase, in fact, as interest rates have decreased many have reduced repayments (and spent the money) or simply borrowed more. This applies to many businesses also that may have used low interest finance options and will need to refinance. Interest rates will probably double in the next year or so.
The cost of living pressures on individuals and what to do about them outside giving unsustainable pay increases is an issue for business too. After all, businesses struggle to pay more if they can’t pass on the cost or find productivity improvements to offset it. Employers going broke benefits nobody.
The alternative course of action is that both businesses and employees would do well to check all their expenses. A good starting point is to list them all out, and prioritise by importance, then add a column where you estimate the cost increases you’re likely to see or the savings you can make by adjusting your requirements.
It’s not uncommon for politicians, individuals and businesses to confuse income and profit (or earnings). Some of the confusion comes from the English language, and most people never get taught some basic financial fundamentals in school. I’ve seen educated people say they get paid say $100,000 per year, so they can spend $2,000 per week. But they forget that they have to pay tax on that amount. Likewise, businesses that are charging say $100 per hour, and from that deduct variable costs in their minds of say fuel and wages (say $60-70 per hour), meanwhile forgetting all the other running and fixed costs, giving themselves a false sense of profitability. Itemising and adding up all spending over a year by category can give some great insights into how small expenses add up to eat up much of the profit we thought was there.
Let’s look at some items in many household expenditures. Buying food from the smoko shop instead of bringing left overs adds $15 per day, $75 per week, or over $3,000 extra per year. A packet of cigarettes costs about $50, many use more than one per week. You can buy 6 beers at the pub, or a case at the bottle shop next door for the same price. Buying one cup of coffee per day instead of making one at home adds up to $2,000 per year. Buying pre-packaged meals or take away instead of making it yourself would double spending and often give worse quality food (depending on your cooking skills). An average household throws out a quarter of the food they buy simply because we overbuy at the shops and go for a new packet rather than finish the already opened ones. Not filling up the car when you’re nearly out of fuel (at the spot price) rather than filling up at the low point in the price cycle (or using the 7Eleven app to hedge your price) and splash filling the tank (or using jerry cans) saved a friend who bothered to track it over 10% in a year, or about $500 for an average car.
We all have our vices, and I’m not saying to live a life of misery. But I am suggesting that most people or households could probably save $10,000 per year of after tax money simply by reviewing expenditure on many small but overall not so insignificant purchases.
We’d all like to think we run super lean businesses without any waste, but in my experience it is small to medium businesses that have a much better grasp on expenses and value for money than large ones do. But whilst they know the cost of most items, it’s easy to dismiss savings possibilities and SME’s are too often tied up working in the business than allocating time to work on the business. For instance, how many businesses bother to contact their energy retailer every year to get a 7% discount? Or get price comparisons on insurance as it’s a hassle to change? Freight can sometimes cost a similar amount to the item being purchased – can you plan better, wait a little bit longer without getting express shipping, or simply shop to get a better transport rate? We’re all busy, but what would it mean to your business’ bottom line if you could save say 5-10% on average on all your expenses? In most businesses, that would probably double the bottom line.
It is very clear that over the next year we will see increasing supply chain shortages. Shipping costs have gone from $USD200-300 for a 20 foot container to Australian ports in 2019 to $USD6-10,000 now. Official inflation in the world’s largest market (the USA) is already acknowledged as 8.5%, the highest there in 41 years. Manufacturing costs have increased 25% or more, and manufacturing lead times that used to be say 4 weeks are now commonly 9-12 months. Companies have held off in passing on these increases because of competitive pressures as well as forgetting that the replacement cost of the item on the shelf has actually gone up. This lag in price increases has come to an end as availability no longer meets demand, and prices and availability will continue to get worse on most products.
Every journey begins with a small step. Like riding a motorbike or driving a car, you need to plan at least a couple of corners ahead. Small changes in adjusting the line will ensure we all stay on the road rather than losing control.
As always, onwards and upwards!
Fred Carlsson
General Manager
