One thing is for sure: I am no economist.

I am just a poor, simple bean counter who spends a lot of time looking at the financial results of Australian small and medium-sized businesses.

I also did extremely poorly in economics at university, so there is a decent disclaimer right there.

That said, one thing I have always thought about economics is that theory only gets you so far. In theory, all things can be equal. In practice, they very rarely are.

So rather than trying to predict exactly where the economy goes next, this is simply how I see things on the ground.

And at the moment, I am wary.

Inflation is not disappearing

Over the past 12 months, inflation has probably not been so much trending upwards as trending sideways.

That is the problem.

It does not seem to be falling quickly enough to get to a level that the Government and Reserve Bank are comfortable with.

When inflation hangs around, the Reserve Bank ultimately comes back to the main lever available to it: interest rates.

And interest rates are a very blunt instrument.

They do not just affect people buying houses. They affect:

• business loans
• equipment finance
• overdrafts
• commercial property
• consumer spending
• the general willingness of people and businesses to spend money.

At the time of recording, there was also plenty of discussion about the possibility of further interest rate increases before the end of the year. I certainly would not rule that out.

Fuel prices do not stop at the petrol bowser

Another issue is fuel.

Higher fuel prices obviously hurt when you fill up your car, ute or truck.

But the impact goes much further.

Higher fuel costs can flow through to:

• freight and transport
• imported goods
• farming and agriculture
• manufacturing
• groceries
• general business operating costs.

A farmer paying more to operate machinery and transport produce eventually has to recover that cost somewhere.

An importer paying more for freight faces the same problem.

It all feeds through.

And unfortunately, if those higher costs add more inflationary pressure, we find ourselves looking at the Reserve Bank and interest rates again.

The word I do not particularly want to hear

At the time of recording, the Reserve Bank Governor had also raised the possibility of recession.

I personally do not particularly want to hear that word.

Recessions can become somewhat self-fulfilling.

Businesses hear recession and stop spending.

Consumers hear recession and stop spending.

Businesses then see sales weaken, become more cautious, and potentially reduce employment or investment.

That does not mean everyone should panic and lock the doors.

Far from it.

But given what I am seeing across SMEs, I do not think this is the time for businesses to become complacent about costs.

Think twice before locking in new overheads

For SMEs in particular, I would be looking carefully at fixed commitments.

Before taking something on, ask whether you genuinely need it and whether the business can comfortably carry it if conditions become harder.

That might include:

• signing a long-term commercial lease
• giving personal guarantees
• financing new vehicles
• replacing equipment earlier than necessary
• adding permanent overheads before the additional turnover is there.

If you are buying a new vehicle or piece of equipment because it will help you complete confirmed work and generate additional income, that may make perfect commercial sense.

But if the argument is simply, “The ute is getting a bit old, so I may as well replace it”, perhaps think about whether another 12 or 18 months is possible.

A four or five-year equipment loan is not just for Christmas.

It will still be sitting there long after the excitement of the new ute has disappeared.

Build yourself a bit of a war chest

None of this means businesses should stop investing.

Good businesses still need to grow, replace equipment, hire people and take opportunities.

The point is simply to be deliberate.

One interesting thing for me has been that I have not necessarily seen the level of inflation reflected across the profit and loss statements of my SME clients that I might have expected.

My view is that government expenditure has played a meaningful role in some of the inflationary pressure we have experienced. That is my observation rather than an attempt to provide a detailed economic analysis.

Regardless of where inflation has come from, the practical message for business owners remains the same.

This is not the time to panic.

But it probably is the time to:

• think twice before spending
• avoid unnecessary long-term commitments
• keep a close eye on cash flow
• make sure additional debt has a clear commercial purpose
• build up a bit of a cash war chest where you can.

Nobody knows exactly what the next 12 months will bring.

But a business with lower fixed costs, manageable debt and some cash in reserve generally has more options than one that has stretched itself too far.

That is my two cents.

Are you seeing the same caution in your business or industry, or does the economy look stronger from where you are sitting?

Disclaimer: This article provides general information only and does not take into account your personal circumstances. It is not financial or tax advice. You should seek independent advice from a qualified professional before making decisions about tax, legal or financial planning matters, along with loan structures or entity structure.