One of the post-COVID challenges businesses face is inflation. Recent reports and commentary from the Bank of England currently predict that UK inflation could rise above 5% by early next year.
Inflation hits businesses on both sides of the profit equation. On the one hand, costs rise across all the categories of expenditure. On the other hand, sales can drop because consumers have less money to spend. And the net result is that profit margins are eroded, and sales volume reduces.
When you read about inflation rates of 5%, you might not think that is too much of a concern. However, even if a business has only a total cost of goods sold of £100,000, 5% inflation represents £5,000 off the bottom line. And, if margins are already tight, if not addressed, a £5,000 reduction gross margin could put a small business at risk.
However, businesses have survived inflation rates higher than 5% in the past. But the situation does need to be managed on an ongoing basis. So, here are some tips to help you get your business through a period of relatively high inflation.
Monitor the Situation
The global and national economic news might seem far removed from life on the ground running a local business. Nevertheless, as demonstrated in the above example, even the smallest business can be severely damaged by the effects of inflation. So, it is advisable to keep an eye on the economic news, however depressing it might be to do so.
Of course, the effects of inflation will soon become apparent in the prices you pay for goods and services. So, keeping the accounts up to date will be more crucial than ever. And it would also be helpful to spot-check prices on critical supplies you purchase, such as raw materials.
As inflation hits consumers, your employees will begin to feel the pinch, too. So, keep an eye on salaries in your sector to ensure that you keep pace with the trends. Increasing salary costs during a period of inflation is probably the last thing you want to do. But, if you don’t keep employees onside, you could lose some key workers.
Build Inflation into Your Forecasts
It would be best to update budgets and forecasts regularly during a period of inflation. You can add a percentage increase to costs into long-term budgets to reflect the current inflation rate, for example. And budgets should also be amended when you become aware of vendor price increases.
Your cash flow forecast will also need adjusting to reflect the rising prices. As customers feel the squeeze of rising prices, you may also see accounts receivable taking longer to be settled. And it would be prudent to increase your bad debt provision.
Reduce Consumption Where Possible
When there is a period of high inflation, you can do nothing about the price increases. However, one way to mitigate the effects of rising prices is to reduce consumption. If you manufacture products, for example, you might be able to find more efficient manufacturing processes. And you could take steps to reduce waste.
Every penny counts when costs are rising. So, getting employees on board with a consumption and waste reduction program may also help. You might also want to consider areas of your business that could be automated to save on labor costs.
Implement Robust Budgetary Controls
Monitoring costs and reflecting inflation in forecasts will show you how inflation is affecting your business. But you must take positive steps to control costs, too. And that process begins by questioning almost every purchase. And the questions that should be asked are, do we need it, and can we buy it cheaper elsewhere.
In a smaller business, budgetary control will be down to the business owner. But in a larger enterprise, employees must be tasked with keeping spending under control. So, it will help to make performance against budget a key performance indicator (KPI) for all employees with purchasing responsibilities.
Look for the Best Deals and Negotiate
In a period of inflation, every expense should be up for price negotiation or a vendor switch. So, it is best not to merely continue purchasing products and services from the same vendors you always have. Instead, review each significant purchase to get the best possible deal.
Ask for quotes from several vendors when you renew contracts or make purchases. And, if your current supplier can be undercut, give them an opportunity to come back with a better price. Every company will be in the same boat. So, push for better deals because suppliers will not offer you their best price without prompting in a challenging economic climate.
Be Cautious About Cutbacks
Cutbacks may be inevitable when inflation is eating into your profit. However, it would be unwise to make cutbacks without first thinking through the ramifications.
If cutbacks become necessary, look first at the non-essential products and services you purchase. It would be best to avoid any cuts that impact product quality or customer service. Marketing expenditure should also be maintained at a reasonable level if possible.
There are many aspects of business expenditure that can be cut before the critical ones are considered. Sales personnel could stop flying business class, for example. The quality of paper used for printing internal paperwork could be reduced. Making relatively Insignificant savings on the nice-to-haves could prevent the need to cut back on essential supplies.
Increase Your Prices
Price rises will probably become inevitable during a period of inflation. But buyers become more price-sensitive when there is inflation. So, it would be best to keep an eye on competitor prices before initiating a price increase.
How you go about increasing prices will depend on the market in which you operate. If you sell a product people only buy once, your primary concern will be your competitor’s pricing. So, phased increases, keeping in step with competitors, might be the best approach. If customers repeatedly order, though, a more transparent approach would be best. You might want to give customers advance notice of price rises and explain why the increase is necessary.
Increase Value to Customers
Consumers will be experiencing a reduction in their disposable income when the cost of essentials rises. So, people will be looking for the best value deals on all their purchases. But, if you can increase the value of your products or services, you can capitalize on people’s desire to get the best value for money.
So, highlighting the money-saving benefits of your products in your marketing will help to maintain sales levels. Or push the fact that your products last longer than those of your competitors. Offering volume discounts will also help you stay competitive and possibly increase sales volume. And the increased sales volume will go some way towards compensating for the reduced margins.
Conclusion
Inflation is not yet as severe as it was in the early 1990s. However, even at 5%, inflation can cause significant issues for businesses. But taking a slash-and-burn approach to cost-cutting is not the solution. Instead, analyze the numbers, look for ways to get more for every dollar you spend, and offer customers the best value for money you can.
