Rising costs push businesses towards higher prices just as interest rates and household bills limit customers’ ability to afford them.

For an Australian business owner, the problem can be expressed in one uncomfortable sentence: the price needed to make a sale worthwhile may be higher than the customer is prepared, or able, to pay.

Suppliers charge more. Labour, freight, energy, insurance and finance place demands on the business. Customers face their own pressures and become more selective.

A business can be needed, well managed and valued by its community, yet still struggle to earn enough from each transaction to remain viable.

That is the tension behind business confidence. Owners are assessing whether tomorrow’s sales will justify today’s commitments.

The squeeze is measurable

NAB’s September-quarter business survey provides evidence of the pressure.

Purchase costs rose 1.2 per cent over the quarter, compared with a 0.5 per cent increase in final product prices. Its sales margins index fell to its lowest level since June 2020.

Business conditions slipped to minus two index points. Confidence recovered eight points to minus eleven, but remained well below its long-run average.

These are survey indicators, rather than a statement that every Australian business is losing money. Nevertheless, they describe an important difficulty: costs are advancing faster than businesses can recover them through selling prices.

There is insufficient evidence to call this the largest such gap in Australian history. It is serious enough without that claim.

Higher prices do not necessarily mean higher profits

Customers understandably notice the price they pay. They rarely see the costs behind it.

A higher café bill may reflect more expensive ingredients and operating expenses. A larger repair quote may reflect parts, freight and labour. A professional service may cost more because the business must recover higher overheads from its available billable hours.

Some businesses have room to absorb increases. Others have already used much of that room.

Consider a simplified illustration. A business sells a service for $100 and incurs $90 in costs, leaving $10. If those costs rise to $95 and its selling price remains unchanged, the amount left falls to $5.

A relatively modest cost increase has halved the surplus from that transaction.

Raise the price to $105 and the business restores its original $10 surplus — provided customers keep buying. If the increase causes enough customers to leave, the business may be worse off.

The owner faces two different risks: earning too little from each sale, or making too few sales at a sustainable price.

The RBA is restraining the spending businesses rely on

On 29 September, the Reserve Bank increased the cash rate to 4.60 per cent. Its statement acknowledged that businesses were experiencing cost pressures and raising prices, or considering doing so.

The Bank also said aggregate demand needed to remain subdued for a period to bring inflation back to target.

For a business seeking stronger sales, that creates an immediate conflict.

Higher interest rates can increase its own borrowing costs while reducing the money indebted customers have available. They can also make expansion, equipment purchases and other investments harder to justify.

That restraint is part of how monetary policy works. The RBA is trying to prevent inflation becoming entrenched, rather than seeking to undermine viable businesses. Persistent inflation would itself damage purchasing power and commercial planning.

But interest rates cannot directly produce cheaper oil or remove every supply bottleneck. A business may therefore experience weaker demand before it receives meaningful relief from its costs.

Australia does not have one business economy

National averages can obscure the differences between sectors.

The RBA’s September statement also noted strong growth in business investment and debt. Weakness in a local retailer or household service provider can coexist with major investment elsewhere.

Customers differ too. A household carrying a large mortgage may cut spending sharply. Someone with substantial savings may receive more interest income and feel less pressure.

Businesses selling necessities, discretionary purchases, exports or services to other businesses face different conditions.

This matters because a company cannot plan around the assumption that the national economy describes its particular market.

The useful questions are more immediate: who is buying, what are they postponing, and how much contribution does each sale make after the costs of supplying it?

Affordability changes behaviour before it ends demand

A customer does not have to disappear for a business to feel the squeeze.

They may visit less often, choose a cheaper option, reduce the size of an order or postpone a project.

A restaurant can retain familiar customers while receiving less revenue from them. A trades business can issue plenty of quotes while winning fewer jobs. A retailer can maintain sales revenue through higher prices while selling fewer items.

Being busy is therefore an incomplete measure of health.

Revenue, sales volume, margins and cash received tell different parts of the story. Confidence weakens when owners cannot see how those parts will come together to support wages, bills and future investment.

What businesses can control

The response begins with understanding the economics of the work being accepted.

That means reviewing current costs, identifying which products or services make a worthwhile contribution, and recognising when discounting creates activity without enough return.

Price increases may be necessary, but they require judgement. Clear explanations, reliable service and options at different price points can help customers make an informed choice.

Cash flow deserves equal attention. A profitable invoice does not pay wages until the money arrives. Clear payment terms, appropriate deposits and prompt invoicing can reduce avoidable strain.

Investment also needs discrimination. Delaying everything may protect cash today while leaving the business inefficient tomorrow. Spending that demonstrably reduces waste or improves output deserves a different assessment from expansion based mainly on hoped-for demand.

These measures cannot remove economy-wide pressures. They can improve a business’s ability to withstand them.

The Business Times View

Australia needs viable businesses to employ people, train workers, invest and supply the goods and services on which living standards depend.

Inflation must be controlled. But restraining demand should be accompanied by work to improve supply, productivity and the practical conditions in which businesses operate.

Governments should judge policy partly by whether it helps firms deliver more efficiently, rather than simply adding another obligation or distributing another temporary payment.

Customers cannot spend money they do not have. Businesses cannot indefinitely sell at prices that fail to cover their costs.

The economy depends on businesses being able to charge enough to survive and customers being able to afford enough to keep them alive.