Soaring gas prices. Higher cost of goods. Rising rates for services. Inflation has an impact on every business across every industry, and many business owners are unsure how to mitigate the damage—especially when their customers and employees are also feeling the pressure.
As the government works to get a handle on the highest inflation in nearly 40 years, there are several strategies business owners can utilize to offset rising costs. While raising prices is certainly one of the most obvious—and perhaps most common—it can be beneficial to take a holistic look at all areas of the company to identify where changes can help reduce operating costs.
Areas to review include:
People. In an environment where a business has poor cash flow, an owner’s first instinct may be to cut staff, hours, or compensation. However, it is more important than ever to focus on employee retention and training. Be transparent in communicating with employees so they understand what is happening, how the company is impacted, and the plan of action. Engage employees to help maximize productivity, drive efficiencies and reduce cost.
Process. Make sure to fully leverage technology the company already has in place, then explore new technology that can offer additional efficiencies. For example, any process that includes substantial data entry or relies on Excel can and should be automated, including the management of customer contracts, inventory and budgets. Because many business owners are fully immersed in the day-to-day operations, it can be difficult for them to identify and execute on opportunities like this. An external consultant can be a valuable asset in assessing current processes and providing recommendations on which areas of the business should be a focus and how to make improvements. While owners can be reluctant to invest in this type of consultation, the return on investment is typically substantial.
Financials and Key Performance Indicators (KPIs). Many companies are not effectively managing their finances—at least not on a regular basis. The traditional focus has been on year-end taxes or bank reporting, which may not be sufficient, especially in times like these. To fully understand the state of the business and be able to identify and act on threats and opportunities, business owners need visibility into their financials and KPIs on at least a monthly—if not weekly—basis. Managing to both financial and operating metrics enables a business to be more flexible and make positive improvements accordingly. A metric many product-based businesses may consider is their cash conversion cycle—a measurement of the time to convert inventory into cash. Building and managing to a budget may be a good first step in understanding where and the rate at which the business is spending its cash.
Vendors. Evaluate all of them—not only those who provide materials and supplies, but services as well. Talk to vendors about why their prices are increasing to understand what is occurring in their business and supply chains. Using your budget, examine monthly costs of goods and services and evaluate the value they are bringing to the table. If the cost outweighs the benefit, it may be time to consider alternative vendors, products or services. Before making any changes, it will be worthwhile to negotiate with current vendors, especially if you have a long-term relationship with a strong payment history. Open communication with your vendors will go a long way in securing and/or establishing a successful relationship.
Loans. With interest rates continuing to rise, most business owners will not want to consider modifying existing mortgages or credit facilities at this time. However, if an existing loan has a variable interest rate or a higher fixed interest rate, a business owner should contact their bank immediately to explore other options. If a business is currently struggling with cash flow due to rising costs, working with the bank to secure new financing—or increasing a line of credit—is also an option. It is always better to secure additional credit before it is needed rather than to wait until money is tight.
Price Increases. Research shows that many businesses have already increased or plan to increase prices to help combat inflation. While sometimes necessary, raising prices is not a decision to be made lightly, and should not be viewed as the first step. It is important for business owners to consider these other strategies to first gain a thorough understanding of their costs so that if the time comes to raise prices, they can effectively communicate with customers why it needs to be done. At that point, it isn’t about pocketing profits, but simply maintaining a business and taking care of employees. Taking time to explain your leadership approach and strategies that have been implemented to keep costs down is important in maintaining customer loyalty. Remember that we are all impacted by inflation and your customers will also be looking to reduce their costs. Transparency can help build trust and keep them with you through the storm.
Overall, this process can be overwhelming for business owners who are already stressed about finances and the state of the economy. Engaging a trusted advisor to conduct a business audit and provide guidance on process improvement, help build and manage budgets, develop KPIs and execute changes throughout the organization can be invaluable. While there isn’t much an individual business can do to change inflation, you can lean on experts to help overcome the challenge.
It is important to remember that ups and downs are normal in the economic cycle. The world has been through this before, and we will get through it again. There will be a market correction, and hopefully, using these strategies will enable companies to come back stronger than ever.
This article is authored by Robert Spatola, CPA, consulting manager at RDG+Partners, and was originally published in the Rochester Business Journal on June 22, 2022.