After the pandemic, high inflation and supply chain disruptions pose new challenges to all businesses. A steep increase in inflation pulls down consumer demand, thereby slowing businesses’ sales volumes. Moreover, higher electricity, logistics, rent, raw materials, maintenance, and repair costs are increasing expenses, reducing profit margins. Personal savings support most small businesses. High inflation can deplete these savings, putting small business owners at financial risk.
The Impact of Inflation on Small Businesses
Higher expenses and supply shortages force companies to increase prices, cut costs, and stall growth efforts. A business cannot remain profitable for long in an inflationary environment and could plunge into losses. Thankfully, inflation keeps moving and is unlikely to grow steeply for a long time.
But businesses must pay those bills to survive economic weakness to see the other side of economic recovery. This article provides small business owners with some practical tips to combat inflation.
Tip 1: Create Financial Forecasts for Several Inflationary Scenarios
Small business owners study early signs and get a sense of upcoming challenges. Inflation is not a contingency but a scenario built over two years. Once you know your challenges, you can put your business through various simulations. In the finance world, it is called financial forecasting.
A forecast has an upper and lower range showing best and worst-case scenarios. As a business owner, you know your expenses better than anyone. Before taking any action, write down a certain percentage of the price rise you expect from suppliers, utility bills, wages, logistics, loan interest, rent, and other expenses.
You can take your income statement from last year, create a column on the right for the best and worst cases, and put your expectations in each row. Once you know the worst, you can find problem areas and devise a strategy to address the issue. A targeted approach can help you avoid wasting time, which is even more precious in an inflationary environment.
Tip 2: Identify Cost-Cutting Opportunities
Once you have the financial picture of your business and the possible impact high prices can have on your business, you can identify cost-cutting opportunities. A smart strategy would be to start with the biggest expense and ensure not to go so aggressively with cost cutting that it harms your business. Here are some areas you can look for:
- If you have a rented office space, look for an opportunity to reduce your space usage. You can also ditch the office to adopt remote working and invest in business tools that facilitate working from home.
- Cancel underutilized subscriptions and technology tools.
- Outsource non-core activities like accounting and human resources.
- Renegotiate insurance or internet contracts, loans, and credit cards.
- Revisit your processes and streamline them, like removing lesser-used reports.
- Look for tasks like scheduling and billing that can be automated with technology.
- Reduce employee meetings and workshops to save costs.
Tip 3: Manage Cash Flow to Maintain Liquidity in the Business
While cutting costs can give some relief from rising prices, make sure your business’s cash flow doesn’t dry up. When profit margins are tight, businesses need cash to keep operations going. You can use the following tips to maintain liquidity:
- Monitor your outstanding invoices and follow up on the payments.
- Don’t offer more goods or services if the client has unpaid invoices.
- Give clients various payment options, from credit cards to cash. If a large amount is unpaid, offer a monthly payment option. You can also encourage clients by offering discounts on early payments.
Tip 4: Increase Prices Tactfully
The most common way to combat rising costs is to pass them on to customers by increasing the price of your products. But this move could make customers want to look for cheaper alternatives. So instead of using it as the first option, use it as the third or fourth option.
Inflation impacts not just your business but most businesses in the country. Before increasing prices, look at your market and competitors, as they will also increase prices. If the overall market price rises, you may not lose many customers. Once you decide to increase the price, increase it gradually to minimize the price shock for customers.
By growing your price tactfully, you can retain most customers while remaining profitable.
Tip 5: Revisit Supply Chain Contracts and Stock Inventory
After strategically doing the most obvious things, you can look for more creative solutions with your inventory and supply chain. One major cause of inflation is the shortage of certain goods.
You may have perishable and non-perishable goods. You can stock up on non-perishable goods in bulk and get a better deal from the supplier. For perishable goods, you can have more than one domestic supplier. Locking in your supply at a fixed rate may make business sense by signing an agreement.
These are just a few tips to combat inflation. When your books are up-to-date, they give you a financial picture of your business. You can sit down with a professional bookkeeper to identify more opportunities to reduce costs and track the outcome of your actions.
Contact Glenn Graydon Wright LLP in Oakville To Help You With Your Bookkeeping Needs
A skilled bookkeeper can help you update your books, streamline your processes and cash flow, and reduce waste. At Glenn Graydon Wright LLP, our bookkeepers can provide services to support your business and financial planning functions, whether you need partial or complete support. To learn more about how Glenn Graydon Wright LLP can provide you with bookkeeping expertise, call us at 905-845-6633, or connect with us online, to set up an initial consultation.