How To Deal With Inflation: Tips For Your Company.
We have asked one of our experienced business advisors, Brian Childs, for some of his top advice for entrepreneurs in small businesses struggling with rising costs of living, inflation, and financial strains. These are the tips Brian provided.
Be interested in rising costs. According to Brian, it is important to investigate charges carefully, as many small-scale business owners are willing to accept a cost increase to run their business without researching further.
“The inflationary ‘tide’ is coming across the economy, and everyone is impacted. Your suppliers, freighting suppliers, packaging suppliers, and so on are all likely to be experiencing inflation-driven cost increases. These suppliers will likely look to pass these cost increases along to the next business down the purchasing chain,” Brian said. Brian.
“Business owners can be absorbing a ‘death by a thousand cuts’ and not realize until the accumulated harm is evident,” the expert declares. “They might see their costs rising item by item without checking the logic and scale behind the cost increase with their supplier.”
“I am seeing owners absorbing price rises of 10 percent to 15 percent without any comment from their suppliers. Rising logistics and freighting costs can particularly impact regional and remote businesses.”
Conduct a financial health check
Brian recommends that you set the time aside to conduct an internal audit of your financial health and cost audit throughout your company. For this, he suggests you:
- Print the last income and loss statement using your accounting software and closely examine the expense of the goods sold (if appropriate) and your operating expenses for the year.
- Calculate the cost of each expense as a percentage of your revenue, and then use the figures to determine the highest prices.
- Typically, the three largest categories are the cost of the goods sold, wages and salaries (including workers’ compensation, superannuation employees’ amenities, and other expenses), and the cost of occupancy, which comprises your rent plus fees and expenses costs for property maintenance.
- Brian mentions that if you’re certain the figures are accurate, you can look deeper into the various categories.
- “Once you have identified and quantified your costs, you can examine them and explore cost reduction.”
Examine your costs for staffing
The first step is to review your pay structure and ensure that you’re paying your employees the right award and superannuation amount.
“Your automatic payroll system computes the annual and personal holiday entitlements. However, there is no way to verify the right amount is in place, which is the biggest cost for many companies.
Once you’ve reviewed the cost structure of your team, you can assess the team’s performance.
“Check if your staff are fully productive for the hours of attendance and if extra training is required to remove any productivity blocks. You can also examine whether your staff members have a current duty statement and are fully informed of required duties and performance metrics, measured for feedback.”
Review your occupancy costs
Brian suggests you review your lease as a beginning base for looking at your costs for occupancy.
“Has your landlord or managing agent increased the rent each year following the formula in your lease? If the rent increase is CPI plus a percentage, check if your lease specifies which CPI (local or national) to use.”
It is also possible to have your property surveyed by a professional or do it yourself and verify the lease area according to the lease terms.
“You could find you are paying for more square meters than has been surveyed. If so, you could renegotiate for both a reduced rent and recovery of overpaid rent since the beginning of the lease. Ask your accountant for help with these calculations if in doubt.”
Brian suggests that you also compare the total occupancy cost, including rent, expenses, and tenant maintenance, such as repairs and cleaning per square meter, versus the average prices for your business or industry.
“If you find your occupancy costs are excessive compared to industry norms, you might then consider relocation or renegotiate with your landlord when your lease or an option for renewal is due.”
Contact your suppliers
When you review each year’s cost of products, it is important to watch suppliers for signs of cost creep. According to Brian, Brian Cost creeps, indicators of cost creep may be:
- Unannounced increases in charges with an invoice to be completely paid
- The announcement of higher amounts appears to be excessive
- Modifications to terms and conditions have yet to be made public, like reduced payment times and reduction or removal of rebates, elimination or reductions in discounts for bulk purchases.
- If you’ve noticed an increase in costs, Contact your supplier.
- “You could negotiate for a reduction, ask for a delay before the cost increase or diminished term is imposed, for example, three months. You could also ask the supplier what can be done to minimize or avoid the cost increase, such as a volume discount. If the supplier refuses to offer concessions, ask for extended payment terms without penalty.
- The other option is to investigate other suppliers and look for any special offers that you could present to your supplier.
- “Assume that you are a valued customer and the supplier wishes to keep you as a loyal customer.”
Get professional help
Your accountant can assist you in more ways than just Tax returns and BAS, as well as the provision of financial modeling and other expertise that you can benefit from.
“Once you have completed your financial health check, make an appointment to meet with your accountant. Ask them to remodel your profit and loss into a projection with your findings applied and calculate your break-even point.”
“You can then work out the margin you need to generate a net profit that will recover your return on investment (ROI), principal of loans, and other recoveries unique to your business.”
After you’ve analyzed your expenses attentively, taken steps to cut costs wherever you can, and created a projection for your business’s financial future, it may be time to examine the structure of your price.