Are we there yet? Opportunities and challenges for 2025

Australia’s small- and medium-sized businesses are on the frontline, weathering the worst of an unpredictable economy. Now, with inflation easing and the Reserve Bank cutting interest rates, there may be cause for cautious optimism. The tide may finally start to turn.

Small business owners who survived 2024 should take a bow. They’ve persisted through some of the most difficult trading conditions that Australian businesses have experienced for some time.

2024 saw the aftershocks of 2023’s interest rate hikes roll through the economy, coupled with escalating input costs and wages. Because small businesses tend to accept prevailing prices in the market, many found it difficult to pass on increased costs to customers in the form of higher prices. Consequently, small business profit margins have been caught in the squeeze. What’s more, high inflation and interest costs reduced consumer confidence and spending power, resulting in customers spending less.^{Superscript: 1}

So, as we look to the rest of 2025, what can business owners expect? We outline four opportunities that 2025 may bring for business owners below.

1. Rate cut may ease wage pressures and boost consumer confidence

The Australian economy seems to be getting back on track, with inflation consistently tracking within the Reserve Bank of Australia’s (RBA) target range of 2% to 3%.^{Superscript: 2} As a result, the Reserve Bank of Australia cut interest rates for the first time since 2020 at their February meeting.^{Superscript: 3}

This cut brings the official cash rate down to 4.1% from 4.35%. This move comes earlier than some initially expected, however the size of the cut is broadly in-line with the initial forecast of two 0.25% reductions this year,^{Superscript: 4} commencing in May.^{Superscript: 5}

For small businesses, rate cuts may deliver benefits on two fronts:

1. Rate cuts are expected to ease the cost-of-living pressures faced by small business workers. In turn, higher discretionary incomes are expected to reduce the pressure these workers are currently placing on business owners to lift wages.^{Superscript: 1}
2. Interest rate cuts may improve consumer confidence – a critical driver of demand for small businesses.^{Superscript: 6} Further, as inflation comes down, household spending may increase as wages rise in real terms.^{Superscript: 7} Indeed, as of 10 December 2024, consumer confidence was 4.7 points higher than the same point in 2023.^{Superscript: 8}

It’s likely that the customers who are struggling the most will be the ones who gain the most from an interest rate cut. However there may not be a direct flow-on benefit for small businesses if customers save the benefit that they get.^{Superscript: 1}

Another factor that may compel consumers to bank any relief from an interest rate cut is lower residential property prices.^{Superscript: 9} Even if they have no plans to sell their home, if property prices weaken, homeowners can feel poorer.^{Superscript: 1}

Given macroeconomic indicators don’t always reflect experience on the ground, many business owners are wanting to see concrete evidence in their own business that customer demand is lifting and margins are improving. It’s only with that concrete evidence that they can determine a turning economic tide.^{Superscript: 6}

And when those green shoots of growth do appear, businesses owners are likely to want to increase inventory, buy equipment, remodel or strengthen their marketing to take full advantage.

ANZ makes it quick and easy to invest into those opportunities with unsecured lending.

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• Business lending options
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2. Efficiency initiatives have strengthened resilience

Although conditions vary between industries and regions, many of the small businesses that held their ground through 2024 did so by deploying a range of survival tactics. These included upping technology use, trimming costs or producing more output with fewer inputs.

If conditions ease as expected, these efficiency disciplines have set up those businesses for a stronger 2025.

What’s more, business resilience will help small businesses trade through any potential international risks in 2025, such as increased US tariffs or geopolitical tensions.

To strengthen profit margins further, small businesses may consider negotiating hard with suppliers, including utilities. This may include putting a deposit down to lock in a price when ordering supplies and equipment.

On the customer side, adding surcharges for special requests, express turnarounds or out-of-hours service – or asking for deposits and prepayments – can help get money in the door faster and strengthen profitability. Lastly, tighter cost forecasting and cashflow monitoring can bring efficiency gains. For some small businesses, this can include savings or ‘squirrel’ accounts – siphoning off and quarantining funds for outgoing payments such as GST.^{Superscript: 6}

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• The importance of small business cash flow
• Business transaction accounts

3. Tight labour market driving technology uptake

A big challenge for small businesses has been having good workers with the right skills at an affordable cost.

The tight state of Australia’s labour supply was noted in the low seasonally adjusted unemployment rate of 4.0% for December 2024. While this figure did show a small increase on the 3.9% recorded in the prior month, this was partly driven by an uptick in the participation rate, with the country’s employment-to-population ratio climbing to a record high of 64.5% during the same period.^{Superscript: 10}

What’s more, wages were also up – with the seasonally adjusted Wage Price Index rising 0.7% over the December 2024 quarter and up 3.2% over the year.^{Superscript: 11}

To manage this pinch, many small businesses haven’t replaced staff who’ve resigned. This can mean everyone must run harder to do the same amount of work, especially the business owner. Over the long term, this may not be sustainable. As a result, businesses will need to look to ways to fill the labour gap, particularly if customer demand does pick up in 2025.^{Superscript: 1}

Fortunately, technology is providing a range of options, with the tools that were previously only accessible to large businesses becoming more accessible to small businesses. To take advantage, small businesses should identify their most labour-intensive tasks and look for ways to streamline them, such as by automating end-of-day reconciliation and service/operational messages. Small businesses can also use generative AI to scan their accounts for savings, reply to customer emails and produce social media posts.^{Superscript: 6}

Some small businesses are fine tuning the types of goods and services they offer so that they’re less time consuming. For example, hospitality businesses can limit their menu to less labour-intensive dishes. And other businesses can reduce store hours and direct customers to buy online.^{Superscript: 6}

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• ANZ’s partner offers section, which includes discounts on important technology to boost your business.
• Small business AI – Harnessing the Power | ANZ

4. Promotional activity becoming more targeted

To navigate weak and uncertain consumer demand, many small businesses boosted their marketing activity over 2024.^{Superscript: 6}

Increasingly, technologies are making it easier for small businesses to understand their customers and their purchasing patterns through better tracking and sharper analytics. These technologies help small businesses to more precisely identify niche markets and repackage and reposition their offerings to reach different prospects.^{Superscript: 6}

Advances in analytics are also driving down the costs of marketing, enabling small businesses to more precisely analyse their ad spend, identifying what works and what doesn't. Small businesses are then cutting back spending on digital media that isn’t yielding results.^{Superscript: 6}

For businesses that experience spots of low demand, there are also opportunities to deploy spare capacity into promotional activity. As smart phone capabilities and graphic design tools make it faster and easier to produce marketing content, staff with downtime can make videos and take photos for social media posts. They can also call customers, ask customers for reviews or hand out flyers. Doing promotional work during slow times can help smooth troughs in customer demand.^{Superscript: 6}

Want some more help?

• Business plans and templates: How to get started | ANZ
• Search engine optimisation (SEO) tips for small business | ANZ
• Your guide to small business email marketing

ANZ is here to help

Whatever 2025 brings, ANZ is here to support you through every stage of your business journey. Whether you want to better manage your cashflow, scale up your growth or simplify your payments, we can support you to reach your business goals sooner. Get in touch with ANZ today to discuss your business needs.