Coping with the pressure of inflation

With inflation sky-rocketing worldwide, how can you protect your business and your customers? No one likes putting their prices up but sometimes it’s the only option to keep your business running.

Inflation is on the rise and making headline news on a regular basis. This coupled with winter illness, the Covid-19 pandemic and supply chain disruptions means that for some businesses may feel like they’re in the middle of a perfect storm.

Inflation is currently up to 7.3% — the highest in over 20 years. Driven by relatively low interest rates, unprecedented levels of government stimulus spending, global supply chain disruptions along with higher energy and labour costs. For businesses in sectors where revenue hasn’t yet recovered to pre-pandemic levels, profitability pressures are exacerbated.

With the Reserve Bank raising interest rates to help tame rising inflation, the stage is set for business debt servicing costs to increase—putting a further strain on cash flows. Rising rates will make operating your business and borrowing to invest in growth more costly, impacting expansion plans and, for some, just running your business harder day-to-day.

There is no easy answer, but the best approach is to make sure you understand the levers in your business and how you can pull those to your advantage.

Put your prices up
We’re talking about this one first as it’s often seen as the last resort. The fear of asking your customers to accept a price increase without impacting demand is a challenging proposition in any situation, none more so than when you know everyone is facing the same challenges.

If you’re thinking about raising prices, consider if there are specific product lines or services that you can increase prices on rather than a blanket increase. Are you more competitive in some areas? Could you make an increase on just one or two product lines but still make a big impact on your profitability? By only passing on increases in some areas, and communicating that, your customers will see you’re trying your best to keep prices fair for them too.

Communication
We are all in the same boat, but seeing price increases without any communication or warning can be a surprise for some customers. If you’re thinking of increasing your prices, whether the increase is across the board or only a few line items, tell your customers about it. Communicate the costs that have increased for your business. An open and transparent line of communication will help your customers to see that you’re running a business too.

Take an in-depth look at your products & services
Are there things you can change within what you offer? Can you reduce the size or volume of a product, changing the design or contents to use less expensive components, or streamlining your services, but keeping the price the same? Being smart about this without your customers feeling like they’re getting poor value can help keep the inflationary pressures at bay.

Absorb costs in the short-term
If you’re in the fortunate position of working in an industry with generous margins, there may be a way to absorb some of the cost increases in the short-term. But only use this as a short-term measure – with inflation predicted to remain high for some time, taking a hit to your bottom line could work out worse in the long run. Instead, examine all your costs and see where savings could be made.

Check your business performance
Take a good look at your business performance and cash flows (and ask for help from a professional if you need it – to see where you can improve margin, improve performance and explore any opportunities for growth. Can you source products at a lower cost? Have you got other options with your suppliers? Can you look at your terms of trade agreements with some suppliers? Are there new markets you could tap into to increase sales and spread your fixed costs across a broader customer base?

Streamlining and automation
Take a look at how you operate your business – are there things you’re doing in your business that take up too much time? Unprofitable product lines or long winded ways of working? Rethink your business’ processes and look at where you can make changes to reduce time and resources needed.

Will automation help? It might not need to be a big IT or tech upgrade – are there better ways to manage your stock and inventory. Can you make small changes that result in big time savings? Do your team of tradies all meet in the office in the morning or head straight to site? Can supplies be picked up directly or in bulk to save extra trips around town – saving money on transport costs. Little changes can make a big impact on productivity and that helps the bottom line reducing the impact of inflationary cost increases.

Keep an eye on your employees
Inflation also has a direct impact on your team. Be mindful that your staff may also be feeling stress as costs rise. They may be stretched as the interest rates on their mortgages increase, as rents go up and as grocery and fuel prices also increase. An employer who recognises these pressures and treats their people well with support, transparency and communication, will likely see less impact on their business from staff issues.

Get professional advice
Come and talk to us, the Villa team is always here to help with information to suit your business and circumstances. Investing in improving your business in tough times is always the right decision.