Business owners are already grappling with massive increases in input costs [let alone actually getting staff]. From fuel costs, electricity costs, logistics, interest rates and stock or material costs, it feels like everything is increasing astronomically [that’s because, for most, it is].
Here are some of the additional input costs you need to be aware of…
Minimum wage increase
The Fair Work Commission [FWC] has announced a 5.2% increase to the national minimum wage from 1 July 2022. Employees on award rates will go up 4.6%, a $40.00 increase a for most. You can find the full details of the annual wage review here and you can review your relevant award by reading more here.
Obviously not all employees are on the minimum wage, but you shouldn’t discount the psychological impact this increase has on your other employees, raising their expectations too.
employer superannuation contribution % increasing
Super payments to employees will change from 10% to 10.5% from 1 July. This continues to increase by 0.5% each year until it reaches 12% in 2025.
Please think about how you plan to treat the superannuation increase in your business and have communicated this to your employees prior to receiving their first payment after 1 July.
If you are looking for more details about this change or would like a few tips on how to go about implementing the increase you can read more here.
super guarantee threshold removed
The $450 monthly income threshold for super guarantee is also being removed, meaning you are now obliged to pay superannuation contributions on earnings to employees making under $450 per calendar month too.
You can learn about all the super changes here.
Increasing your own prices
All of these cost increases leave business owners with no choice but to review their own prices [not helping with the overall inflationary pressures on the economy, but most have no option].
Below are some tips on reviewing your prices and dealing with these cost increases:
- Just do it: We have been talking to clients about increasing their prices for 12 months or so now because that is the reality that small to medium business owners have been experiencing for some time now. If you think you need to increase your prices, just do it, the cost of your inputs is not going down anytime soon unless you are investing in technology or machinery that creates wholesale changes to your processes, and even then, you need to recover that investment.
- Market forces: One option is just to increase your prices based on what you think the market can handle. Everyone is expecting price increases at the moment [they are feeling it themselves] so you may be able to increase prices by a fixed % and pegging that % against some other benchmark like CPI or now the minimum wage increase. Depending on the industry you are in, you might even be able to do a bit of a secret shopping exercise to see what others are charging.
- Allocate costs: Looking at what the market can handle is one consideration, but another is to go back to basics and do a true job costing exercise of what it truly costs to make your product or deliver your service. This process may look like this;
- Make sure you have an accurate understanding of what your direct input costs currently are [including wages]. Look at your costs right now [not the last 12 months because costs are increasing too quickly].
- Think about what you expect your costs to be in the future. You probably don’t want to increase your costs every month so think about where costs might increase and maybe even build in a buffer.
- Think about the best driver of your common/shared costs and allocate a portion of these costs based on estimated volumes [or whatever driver is chosen].
- Add a markup in line with your usual expectations or even increase more if you see a lot of pricing risks going forward.
- Remember, ‘markup’ is different to ‘margin’. Your markup is a % of costs whereas ‘margin’ [let’s say gross profit margin] is a percentage of income. They are different, and yet I often see business owners getting confused between the two.
- Communicate it clearly: Letting your clients know about an increase in your prices is a massive PR exercise and reflection on your brand. How you communicate bad news to your clients is probably more important than how you communicate the good news. Put the time into it, test it with some clients and colleagues, refine it, clearly articulate it and explain why. Maybe even record a video and be upfront with your customers if that is the style of relationship you have with them. Your team needs to reinforce and support the message so make sure they are on board and are given a script for the harder conversations [that’s why a video could work well].
- Rinse and repeat: Don’t stop there though… analyse your profit margins through your P+L. Ideally, you would be able to track gross profits by product or service, or at least by groups of products or services. If the margin is not flowing through, revisit the process and review your costs to identify where you need to tweak your calcs.
- Expertise and technology: To help with the above process, lean on the expertise of others and technology to capture time and costs better [from cost allocation to time costing, there are a stack of applications available but make sure you invest the time to set it up right].
we’re here to help!
If you need a hand reviewing your pricing and job costing, reach out to one of our accountants. If you need a hand more specifically in one of the following areas, please feel free to touch base with the appropriate person:
- For employer obligations + HR Compliance get in touch with Anna Chipperfield [Director of People + Culture]
- For communication strategy reach out to Kirsty Bond [Head of Marketing]
- For technology to track costing and/or profitability have a chat with one of our tech experts Rebecca Mihalic [Director of Sydney] or Jason Daniels [Director of Digital]
general advice disclaimer
The information provided on this website is a brief overview and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision. Please consult with an appropriate professional before making any decision.