No single day is the same for a small business owner. Operating in a dynamic business environment, you juggle through different demand and supply volatility, rising energy costs, tariffs, taxes, supply chain disruptions, inflation, and talent shortages. Even when inflation cools, other factors, like labour, utility, marketing, research, and development, could increase business costs. While some scenarios are predictable, some are not. Navigating through these volatilities efficiently can protect your profit despite macroeconomic challenges. Only those businesses that can sustain headwinds emerge successful. You can see these challenges as filtering out unsustainable and unhealthy competition and promoting healthy competition.
Strategies to Protect Business Profits Against Inflation
You can use various strategies to protect your profit margins against inflation and other unsustainable business costs. Acting on the strategy before the margins hurt can give you better results and help you invest in growth.
Strategies for Cost Analysis
The first step to beat rising costs is by cutting costs. Your book of accounts can tell you many things if you see them carefully. The income statement tells you how much you are spending where. It also tells you which projects, clients, and products are generating how much profit. With these numbers, you can devise various strategies to cut costs.
For instance, if employee costs are high, you could consider outsourcing or automating a particular task and free up employees to do more work that generates higher revenue. This way, you can grow your business without significantly increasing costs.
Another method is to look for areas where you can cut costs. For example, you could consider letting go of low-margin projects.
Strategies for Break-Even Analysis
A break-even analysis of identifying costs could help you take up projects that meet the rising cost and offer better returns. And a historical study of how your break-even point is rising could help you come up with a rate at which your cost increases annually. You could work out a contract with your long-term client to increase the billing at a particular rate to adjust for inflation.
Strategies for Financial Forecasting
When costs rise, you need more cash to meet the expenses. If you fail to adjust for inflation, you might face a cash shortage and borrow money to meet expenses or face penalties for late payments. Understanding the dollar value impact of inflation on your free cash flow and profit margins could help you determine how much cash reserve to maintain to meet the upcoming payments. Suppose rising energy costs might increase your utility expenses. You can maintain adequate reserve for these increases by forecasting the impact of inflation, reducing the need to take expensive loans.
You can also build various scenarios in forecasting, devise an action plan, and track the outcome of your plan. While all your plans may not work as you thought, tracking the outcome can help you improve your strategy and forecasting. This whole exercise of forecasting is dynamic and keeps changing with new developments.
For instance, many business owners moved to remote working during the pandemic. Some found it efficient and adopted a fully remote work environment post-pandemic. However, some business owners found it inefficient and adopted a hybrid model to cut office rent while improving work efficiency. The same strategy that worked for one may not work for the other. A business consultant will look into the strategy that works for you based on the forecast and the actual outcome.
The above strategies will work if your business is not in a fire-fighting situation. However, if your profit margins barely hold up, you can opt for some last-minute strategy.
Flexible Line of Credit
Having a flexible line of credit open to provide liquidity when costs are eating up your reserves is always beneficial. Business owners can get good credit deals by maintaining a high credit score. To build your credit score, consider paying for business expenses with a business credit card. Timely payment of business credit card bills could help you make a good business credit score, getting you better credit terms when needed.
Negotiate With Suppliers for Better Credit and Price
Just as you maintain a good credit score, maintain good supplier relations. Ensure you make timely payments and, if possible, advance payments to get better deals when you need them.
If you face high costs, you could negotiate with your supplier for a better price (maybe a heavy discount). In return, you could offer to pay the full cost upfront or give a more significant order. Having a dialogue with your supplier to understand what they seek could go a long way. Maybe a good reference or helping them get new clients could get you a better price or a longer credit term.
If this doesn’t work, you could consider finding a new supplier that offers better pricing.
Increase the Price of Your Products/Services
Adjusting business expenses has its limitations. It should not happen that you start compromising on quality to cut costs and improve margins. Consider increasing the price of your goods and services. This may hurt your sales a little. Forecasting the impact and building various scenarios for different price points can help you increase the price gradually.
Instead of increasing the price unanimously for all products, you could segment products into basic and premium offerings. For instance, a customer is paying $200 for a subscription. You could offer a $180 basic offering and a $230 premium offering, giving customers a choice to upgrade or cut costs. The break-even analysis can help you identify the price for different offerings.
Another strategy is communicating with customers about the price increase and explaining the reason. Constant communication before increasing the price could give customers time to accept the increase.
Contact Edelkoort Smethurst CPAs LLP in Burlington to Help Your Business Fight Inflation
A professional business consultant can help you devise strategies to fight inflation, forecast its impact, track the outcome, and improvise according to new developments. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting and business consulting expertise, contact us online or by telephone at 905-517-2297.