Inflation impacts all businesses because it impacts the bottom line. From a mathematical perspective, managing inflation entails managing the two variables that affect your profit: your costs and your prices. In this video, I offer tips to help your small business survive inflation by focusing on these two variables.
The inflation rate is the measure of how much prices rise or fall. Most economists will say that a steady pace is a good thing because it is part of economic growth and a steady pace means it is predictable. However, as soon as inflation becomes an issue, most financial experts will zero in on cutting costs to help keep businesses afloat. At the very least, cost-cutting measures will help free up some cash to help business owners ride the tide of rising prices. At best, suitable financial housekeeping measures help create healthy business habits that will help businesses survive, even thrive, during the worst of inflation.
As a business, let’s figure out what you can take, both in the short and long term, to help you manage inflation. Let’s focus on two things: your costs and your product prices.
Reviewing your costs and prices is best done with your accountant or your business coach. That’s because the process requires examining not just dollar values but also, and perhaps more importantly, how these dollar values impact your business—your products and services, your operations and internal processes, and your relationships with your suppliers, your employees, and your customers.
Furthermore, don’t limit the process review to just the dollar value of these variables because costs and prices go beyond just the numbers on paper. Costs also refer to time value, and prices may also refer to customer value.
Let’s start our discussion with costs. To keep it simple, let’s distinguish between the costs of running the business and the costs of goods and services you sell.
With new workflows and work arrangements that the pandemic may have ushered into your workplace, it’s time to review your operations expenses. Perhaps you’ve moved into more flexible arrangements in your team—do you need the same real estate space pre-pandemic, or would it make more financial sense for you to move to a smaller, less expensive office space? Moving to a smaller area also means cutting down on utilities.
Will you need the same office furniture? Would it make more sense to cut down on existing equipment—perhaps trade for better equipment or sell them altogether? Do you have subscriptions and services that you do not use or not as much anymore?
As mentioned earlier, when reviewing your costs, don’t just focus on the dollar value. Think about the time value of your internal processes and protocols. This means any effort towards streamlining your processes also counts towards cost-cutting, because it reduces person-hours in the short term and makes your business lean and more agile, freeing you up from unnecessary procedures that cost time and money.
Think about automating your processes, such as invoicing or payment processes. Think about reducing the need for human intervention for some of your operations, especially if they are predictable, in steady state, and not crucial to the businesses.
When you streamline your protocols and procedures, you invest in your processes to improve productivity and reduce costs. You are investing to save more—making sure you are using your resources for the things that create the most impact on your business.
This is also a good time for you to review your cost of goods. Can you renegotiate prices with your supplier? Can you improve your production processes? Can you reduce packaging? Can you find alternative sources for input?
Think about these processes affect the customer experience. Ideally, these changes should not negatively impact the quality of your products or how your customers experience your products and services. This is especially true for restaurants or any food business.
However, if it does change the product or service experience, you must communicate or explain this to your customers. Communicate which changes you are making and why you are making them.
Depending on the product and how your customers value your products, raising prices may be a better option than cutting costs significantly, especially if cutting costs reduces the quality of your products.
This is also a good time to review how you charge for certain features of your products and services, such as handling and delivery fees. You may consider charging for these related services, or only offer them for free for a certain amount of purchases. If you offer subscription services, consider reviewing which services you provide for each plan.
This is also an excellent time to find alternative revenue streams. Are there market segments you still need to tap? Can your product or service serve as a substitute or alternative for goods and services purchased in these untapped markets? Just as you may be looking for alternative inputs for your products, specific customers may be looking for alternatives for products they typically buy to cut down on expenses.
The good news is that businesses have many options when finding solutions to curb the effects of inflation on their bottom line. However, every business is different and there is no one-size-fits-all solution. This is why I recommend that you work with your accountant and your business coach because they will have a good understanding of your business, your needs, your goals, and which strategies will work well to help you address your needs and achieve your business goals.