For business owners, it is vital to mitigate risk to maximise profit. Your business can face many risks, but of particular concern at the moment are those surrounding interest rates and inflation.

Now is the time for businesses to assess how they might

cope with a sustained period of higher inflation and tighter

financial conditions.

Why is it important?

The latest Reserve Bank of Australia (RBA) decision to increase interest rates has resulted in the official cash rate reaching 6.00% - the highest level since 2001. This is particularly sobering in light of evidence suggesting household debt has reached record levels in recent years.

Naturally, given this increased debt burden, there has been

extensive commentary concerning the future direction of interest rates. The most pressing question that needs to be addressed now by

individuals and businesses with debt is how to

minimise risks associated with a rise in interest rates.

One size doesn’t fit all

The key to effective interest rate risk management is implementing an appropriate strategy to manage the risk in line with a businesses’ cash flow and debt structure. No two businesses are the same.

One business may place a high priority on establishing a

concrete cost of funds (i.e. fixing a rate on their debt for a

period), while another may need a greater degree of

flexibility in their portfolio.

Steps to Improved risk management

To manage these pressures, business owners need to work harder on achieving productivity improvements and review strategies around their supplier input costs.

Businesses heavily reliant on fuel, for example, can consider diesel swaps to offset further price increases.

Labour-intensive businesses with high wage costs can

review core processes to improve productivity.

Business owners should revise their business plan to

assess how they would respond to slower demand.

By Mick Canavan

Senior Business Banking Manager

NAB Ipswich Business Banking Centre