Ways your small business can deal with inflation
In 2022, we find ourselves facing sharply rising inflation, higher cost of living and elevating interest rates. If you’re a small business operator, there’s every chance you’re feeling that pinch in a variety of ways.
While nobody can change the circumstances we find ourselves in, and there’s no magic bullet, there are still meaningful steps you can take to combat these cost pressures and firm up your position to weather adversity.
Do a financial health check
Dive into your accounting software to discover your highest expenses. One way to do this is by examining your cost of goods sold (COGS) and overheads pulled from your most recent profit and loss statement.
According to Government of Western Australia’s Small Business Development Corporation,
“Calculate each cost as a percentage of your turnover and use those figures to look for the largest costs. Typically, the largest three categories will be the cost of goods sold, wages and salaries. Once you have identified and quantified your costs, you can examine them and explore cost reduction.”
Interrogate each of your highest expenses and start looking for more affordable alternatives or ways to reduce them.
Regular reporting and forecasting
While you’re in your accounting software, make sure you increase the regularity of your reporting and forecasting. By understanding on a regular basis, what your expenses and profits are looking like, as well as cash flow and budget accuracy, you’ll be on top of any changes.
Having regular oversight allows you to quickly identify current profitability issues while also forecasting upcoming financial problems that will need attention.
Build an emergency fund
Do your best to build an emergency fund. This may be easier said than done, but by getting brutal about raising rainy day capital, you’ll have a buffer to protect you against sudden rent rises or rising supply costs.
Interrogate your supply chain and COGS
While your supply chain will also be feeling inflationary pressure, you should still look to reduce supply costs and diversify your suppliers. You can also retool exactly what kind of supplies you’re using.
You can start by shopping around for new suppliers while also asking your current suppliers for any possible cost reduction. Go further than this by reimagining your use of supplies in general by thinking outside of the box.
If you’re a café for example, you could look for a cheaper cup supplier, use different cups altogether, or offering ceramic ‘boomerang cups’ to reduce disposable cup use.
Switch up your software and automate as much as possible
Software is one area where competition is high and switching is easy. If you’re using software as a service, there’s likely a more affordable option with a similar feature set.
While you’re shopping around for better value solutions, you can also look to ways you can integrate your systems better to create more efficiency. Efficiency and automation results in tighter workflows and more time for you and your staff to concentrate on profit raising activity and other business priorities.
For example, you might look to better value accounting software and then integrate this with your POS or eCommerce store to reduce both costs and admin burden. Automating as many processes as possible is key to unlocking your time and creating a tighter business flow which lends itself to agility and visibility.
There’s no escaping it sometimes, if your expenses and supplies are becoming more expensive and you can’t reduce overheads and create enough efficiencies, you may need to increase your prices. While no customer will be pleased with a relative price increase, this may be unavoidable.
As Zenbusiness notes,
“Although customers won’t be happy with a price increase, given all the publicity inflation has gotten, most will understand, or at least not be surprised by, an increase.”
Seek professional advice
There’s no substitute for professional advice from a qualified business advisor or accountant. Although your purse strings may be tight, booking in a few sessions with an advisor is a well-placed investment.
An advisor can help you:
- identify cost reduction potential
- examine cash flow
- assist with budgeting
- re-examine your business plan
- perform profit and loss forecasts
- make sure you’re not paying too much tax
- find government relief schemes and incentives you may be eligible for.
This advice is general in nature. Reckon does not give specific business advice.