In this article, we’ll take a look at what the official cash rate is, how it affects interest rates, the effects of recent increases to the cash rate, and what businesses can do to get ready for a change in the economy’s financial landscape.

Before we get into the nitty-gritty, here is a quick warning about business risk. What kind of business you have will determine the risks you need to prepare and insure for.

It’s important to evaluate your company’s particular requirements in order to ensure that you’re acquiring the appropriate kind of coverage.

In order to ensure that the quotations you receive for small business insurance are appropriate for you, questions regarding the nature of your company and the areas you want to be covered will be asked of you when you request quotes.

However, if you have any workers, regardless of the type of business you run, you must obtain employer’s liability insurance.

What is the Official Cash Rate?

The official cash rate (OCR) is the interest rate applied to loans made between financial organisations. Financial institutions frequently pass on these fluctuations to their clients by altering the interest rates on loans as this rate fluctuates.

The Reserve Bank recently increased the OCR from 1% to 1.5%. This was the biggest single increase since May 2000 and the fourth in a row. As a result, the OCR returned to its pre-pandemic June 2019 rate, which was a record low at the time.

We look at the cash rate situation and discuss what firms can do to strengthen their cash flow in anticipation of potential future rises.

Why is the cash rate changing?

Small businesses should prepare for further increases in the cash rate before the year is out.

The majority of commentators now anticipate that the OCR will reach 3% by the end of 2022, with room for a small increase in early 2023.

The justification for forecast changes is based on the fact thatan OCR rise is primarily an effort to control inflation expectations. However, it might also offer some ‘insurance,’ since a higher OCR now means there’s more room to cut again if the economy deteriorates.

Small business owners must plan for higher financing costs over the coming years, just like the average homeowner would.

How are interest rates impacted by the cash rate?

Financial institutions frequently increase the interest rates their customers pay as a result of the higher loan interest rates they pay. A fixed interest rate does not change in response to changes in the cash rate, whereas a variable interest rate frequently does. By taking out a fixed-rate loan, you can avoid being negatively impacted by higher rates even if the cash rate increases.

When taking out a loan, look for a provider that offers transparency on the overall costs. This will help small business owners forecast cash flows more precisely. Some companies offer upfront-priced loans, so you’re crystal clear as to how much you are going to pay back. The procedure is easy, and the results appear right away.

How do entrepreneurs of small companies intend to deal with cash rate changes?

Most business owners perceive growth to represent enhancing their business and increasing sales; as such, they have growth-orientated goals.

However, businesses recognise that they are operating in a climate of rising inflation, supply-chain disruptions, unpredictably interrupted business operations, and the potential for ongoing interest rate increases.

Business owners can develop a range of strategies to try and sustain growth during tougher economic times. These are as follows:

• Staff development, training, and deployment
• Advertising
• Improvements to internal systems and processes
• Engagement with clients
• Growth of new products and businesses

What can local companies do to get ready for additional changes?

What steps might you take to prepare for the challenges that a potential change in the cash rate might bring if you are a local business owner? Here are some quick suggestions you might use to get ready:

• It makes sense to start saving money now to increase the cash reserves that you can rely on in emergencies if you expect a significant change in your company’s finances in the near future.
• Organise and forecast cash flow. To improve your forecasts of future cash flow, update your cash flow management tools.
• Adopt a fixed rate instead. Think about switching from a variable rate to a fixed rate loan to benefit from knowing that your repayments will remain the same even if the cash rate rises in the future.