How to Meet FY27 Cost Increases by Readjusting Your Business Model
With 30 June fast approaching, your focus as a business owner is probably on getting things in order. But it’s worth setting some time aside to consider what you’ll do differently in the new financial year.
There’s no denying that businesses are feeling the ongoing pain of absorbing rising costs, with no sign that things will ease. If your margins have become thinner and the gap between turnover and what ends up in your pocket has widened, this is a useful moment to stop, look at the numbers clearly, and make some deliberate decisions.
In this article, I share the areas you can dive into to understand how money is moving in and around your business, and what levers you can pull to cope better with the new landscape you’re operating in.
Take stock before you act
Most business owners look to cut something when costs rise. But this can create new problems. Before making any changes, it's worth understanding exactly where the pressure is coming from because the source of the problem determines the fix.
Asking some of these questions, ideally with an accountant, can give you some revealing insights into your business that will help you know how to move forward.
Is your revenue flat or declining?
Is your revenue holding steady while margins are shrinking?
Where is the money going that wasn't going there two years ago?
What has changed in your cost base, and is that change permanent or temporary?
When did you last look at what you're making per unit of work, per client, per service?
Pricing
When costs increase, you can raise your prices or absorb the increase and let it compress your margin.
Most business owners, particularly those who've built their client relationships carefully and value them highly, default to absorbing. It feels like the considerate thing to do, and it avoids a difficult conversation. It also works, for a while.
The problem is that increases in absorbed costs accumulate and, at some point, erode your margin altogether.
If you haven't reviewed your pricing in the last 12 months, there is a reasonable chance you are currently subsidising your clients' costs without realising it.
Raising prices is rarely as damaging as you think it will be. In my experience, most clients, particularly the good ones you want to keep, understand that costs go up over time. A straightforward communication that explains the change, gives them time to adjust, and reiterates the value you continue to deliver will get the best response.
If you're not sure whether your pricing still reflects your real cost base, ensure you do that calculation before the end of the first quarter.
Wages
Superannuation, leave entitlements, workers' compensation, payroll tax thresholds, and any applicable award increases all sit on top of the base rate, and they've all moved in the last couple of years.
The superannuation guarantee rate has been increasing incrementally and, at the time of writing, is 12%. Verify this rate is correctly reflected in your payroll, as errors compound quickly. Award wage increases also take effect at the start of each financial year, and if a Modern Award covers your team, those adjustments aren’t optional.
The labour cost of an employee is typically higher than their salary alone. That’s why you must model it accurately, rather than just approximating it.
For some businesses, the current environment is prompting them to look at contractor arrangements. Do this carefully. The ATO's guidance on the distinction between employees and contractors has become more detailed in recent years. If you're considering restructuring any working arrangements, it's worth getting advice before making changes.
Retention is also a cost to factor into your budget. The expense of replacing a good team member, in time, recruitment, and the productivity loss while someone new finds their feet, is often underestimated and should be considered, especially if your wages are below market.
Suppliers and overheads
Subscriptions, software licences, insurance premiums, lease arrangements, professional memberships, and supplier contracts are usually renewed annually and paid without much scrutiny.
Now’s the time to revisit them. Some of these costs will be non-negotiable. Others will have alternatives that weren't available or affordable when you first signed up. Some suppliers will negotiate if asked, particularly if you've been a reliable client and you approach the conversation directly. Some software subscriptions will have cheaper tiers that cover what you use, versus what you thought you’d use.
It won't save you a fortune. But over a full year, a thorough overhead review often finds more than people expect.
Your business model
There’s a good chance that your business was built on a cost base that included lower rent, wages, and input costs.
Ask yourself: If I were building this business today, with today's costs, would the pricing still work? Would the service mix still work? Would the structure still work?
Sometimes the answer is yes, with some adjustments. Sometimes the answer is that a particular service or client type has become unprofitable, and continuing to resource it is undermining the parts of your business that are working well.
Look clearly at what your business is producing and make intentional decisions about what stays, what changes, and what gets retired.
How we help
At Accounting Heart, we work with business owners looking for a strategic partner to help them drive meaningful change in their business. If you're heading into a new financial year feeling that something needs to shift in your pricing, costs, structure, or strategy, a business health check is a good place to start.
It's a focused conversation about where your business stands and what's valuable to address before the year gets away from you.
Disclaimer: This is general information only and is not advice of any sort. No warranty or representation is provided by Accounting Heart Pty Ltd as to the accuracy, currency or completeness of the information contained in this blog. Readers of this blog should not act or refrain from acting in reliance upon any information contained herein and must always obtain appropriate taxation and/or other advice as may be appropriate having regard to their particular circumstances.