The past year has been a bumpy ride for many. Most owners have been focused on maintaining cash flow, as they deal with the combination of rising costs and a limited capacity to lift their prices as customers become increasingly scarce. As 2024 approaches, it’s a good time for small business owners to think about business planning for the next 12 months.
As we look ahead, the macro-economic environment is likely to continue to present challenges, with inflation sticking around and high interest rates keeping overall economic growth subdued. One piece of positive news for owners is that finding staff should start to get a little easier. The most successful businesses in 2024 will be those that focus on lifting their productivity. This is good for those businesses and also for the overall world economy as it emerges from the inflation crisis.
Interest rates likely peaked – but inflation still higher than normal
Fighting inflation was the economic policy focus of 2023 globally. It fell quickly in the first half of the year, making it look like this pandemic-hangover could be short-lived. But economists soon started talking about ‘sticky inflation’ as those early gains stalled. Now, most countries still have CPIs frustratingly above the targets of their central banks.
The consensus amongst financial market analysts (right now, at least!) is that the major central banks have probably finished raising interest rates and will wait to see how the historically fast interest rate hikes impact inflation. But central banks still all have, what economists call, a ‘tightening bias’. This means interest rates are still more likely to go up than come down. Central banks want to be absolutely sure that they have put the inflation genie back in the bottle before they start to even think about cutting rates. As a result, small business owners shouldn’t be planning for lower interest rates in the first half of 2024. Depending on how the inflation data unfolds, they may even need to wait until early 2025 for signs of lower rates in some countries.
Finding staff should get a bit easier
Small business owners continued to have difficulty in finding staff during 2023. This was especially true in industries such as hospitality and agriculture. Job vacancy-to-unemployment ratios have declined in the past year but remain well above pre-pandemic averages. If this decline continues in 2024, as labour markets rebalance, then those small business owners looking to hire should start to find it a little easier.
Lifting productivity key to success
During 2024, the focus of economic debate is likely to switch from inflation to productivity. Productivity is what determines the strength of any economic recovery. According to Nobel Prize winning economist Paul Krugman, “Productivity isn’t everything, but in the long run it is almost everything”. Those countries that can put in place productivity-enhancing policies will recover quickest and strongest through the second half of 2024 and into 2025.
Focusing on productivity can have benefits at the individual business level, too. The most productive businesses usually, according to conventional economic theory, grow the fastest and perform the best. This is particularly true during periods of tough trading conditions, when businesses are focused on getting more out of existing staff and other inputs.
Small business owner 2024 checklist
If you’re a small business owner there are a number of steps you can take to make sure you’re entering the new year in good shape:
- Maintain cash flow focus to stay profitable: Inflation has come down but prices continue to rise faster than normal. Keep a close eye on cash flow and make sure your prices can cover your costs so the business stays profitable.
- Look for automation opportunities to lift productivity: Every business has its own workflows, and reviewing all these processes will help to find areas for improvement. All small businesses, no matter their industry or their size, can also benefit from adopting digital tools to automate as many day-to-day tasks as possible.
- Focus on how you can serve your customers best as they experience tougher times: Next year may continue to be a tough one for customers as cost of living pressures persist. Small business owners need to work out what levers they have to capture scarcer spending by consumers. This includes making sure you reward loyal customers and provide them with what they really need, even during tough times.
If you’re interested in finding out more about how small businesses are performing visit Xero Small Business Insights for more data and analysis.