October 19, 2015 by Andrew Schwarz
Whenever the Australian dollar drops, the question every small business owner wants to know is: 'how will it affect me?'
When the Aussie dollar took another big nosedive back in 2014, leading financial experts were quoted as saying that the fall should offer support to the continued rebalancing act the local economy was going through at the time – with transitions away from the mining sector to non-mining opportunities.
With this latest fluctuation, experts link the blame of weak economic growth to falling export earnings and mining construction. A slump in Chinese shares has added to the selling pressure of the Australian dollar, with many currency experts quoted in mainstream media as saying the recent plunge was “no surprise”.
With volatility in the markets predicted to continue for some time, our dollar is expected to bounce around a lot in coming weeks and even months. The release of China’s official factory gauge last week inspired another contraction in activity, with new levels of pessimism related to the demand for commodities sending markets into an even bigger tailspin.
With growing fears over the Chinese situation worsening, the Australian dollar was not the only casualty. A steep fall in oil prices reversed a dramatic price rally – one that had been the most significant in 25 years – during which the US crude prices had hiked up 27.5% in a three-day period.
In addition to the fall in the Dow Jones Industrial Average, the Nasdaq Composite also took a tumble, with European markets also falling.
Today, with Christmas getting closer, some see the lower Australian dollar as something potentially positive and a possible boost in domestic spending – something that actually benefits small business retailers who often have to struggle to compete against imported products.
For small business exporters, the lower exchange rate can also mean the benefit of an increased competitive edge.
As interest rates continue to be on hold, the effect the Reserve Bank was hoping for seems to be going to plan – boosting house prices and work in the construction sector, while still supporting the retail sector.
As cash flow improves, spending patterns increase – injecting much-needed funds into the pockets of many small business retailers who often then choose to spend more on business-to-business services.
In a local market that is already impacted by an increasingly negative consumer sentiment, the reality for Australians retailer who rely on imported products as stock is that prices will be forced up to balance the fall of the Australian dollar.
For locally-made Australian products, the news, though, could be positive, as a growing number of Australians are forced back to buying locally, rather than relying on the once enticing online retail market that put off-shore producers so easily at the fingertips of Australian consumers.
While many retailers of imported products will be hurt by the dollar’s fall, other Australian businesses are rubbing their hands together and looking forward to a positive immediate future. For farmers and producers, exporting goods such as wheat, wine and wool to the overseas market the drop in the Australian dollar means better business – giving many local business owners a much-needed surge in orders.
For many companies, the fall of the Australian dollar can be a big shot in the arm – with demand for their goods increasing as their goods become more affordable for foreign buyers.
Anyone in the agriculture sector are clear winners – with local exporters of wine, wool, meat and other produce all set to benefit from increased orders. Other companies who may win are healthcare companies, including ResMed and Cochlear - with their income earned in US dollars, their cash flow is getting a whole lot more positive.
Other winners include Amcor Limited – a global packaging company whose earnings include around 95% from operations outside of Australia. As the world’s largest supplier of blood products, CSL Limited is also set to benefit, with the bulk of its impressive revenue generated overseas and a bottom line that is sure to soar as the Australian dollar continues to drop.
The same currency drops that help exporters also have a negative impact on importers – driving their costs up.
One example is Pacific Brands – a business that will face higher import costs in terms of cotton. Other losers include larger builders who rely on raw materials brought in from overseas.
Retail giants, such as Myer, Harvey Norman and JB HiFi will also take a hit as soaring prices on their once cheap imported goods mean less profits – or rising prices passed on to unhappy customers. While some customers may hold off on purchasing new electronics products until prices come back down, others will be forced to purchase due to necessity and will have to absorb the additional costs placed on items they need.
To reduce the risks of your business being impacted negatively, financial experts say that business owners should be reviewing their costs and balancing the potential impact of the dollar fluctuations.
By going back to basics and investigating your profit-and-loss statement carefully, you can understand your costs, how to reduce them and where to build profits back into your business more effectively.
To get a full understanding of how the ups and downs of the Australian dollar can impact your business – and how to protect yourself – talk to AS Advisory specialists today.
Tags: Corporate Advisory