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Inflation is here and all businesses are dealing with it in one form or another. While there’s not much we can do to stop it, the good news is there are some ways we can re-strategize and make inflation work for us. We’re sharing our top 5 ways to fight inflation so your business can come out on top! Check out our cheat sheet on how much you can increase prices before losing any customers.
One of the most obvious ways to fight inflation is to increase your prices. At TGG, we normally advise business owners to review their pricing strategy annually. Now, we’re in a position where it should be reviewed monthly, maybe even weekly, depending on your industry. You should be looking at your profitability based on the cost of your inputs right now and determining what price do you need to charge to make your target margins. You might discover that you need a 15% price increase for certain items or certain customers. Ask yourself if it makes sense to have that price increase all happen next month? Or can you stagger it out and incrementally implement this over three months, six months, etc.?
When it comes to price changes, we’ve seen our clients assign blanket price increases or tack on additional fees. Additional fees can be fuel surcharges or project management fees as an example. If you’re not charging late fees for late payments, it’s time to add that in and hold customers accountable. If you are a business that issues bids or proposals, consider shortening the timeframe for which the quoted price is valid. For example, if bids were previously valid for 90 days, maybe you shorten it to 30 days. There is also a concept called Dynamic Pricing which is similar to surge pricing from Uber. Companies should be charging more for premium services like expedited orders and access to scarce inventory or services.
Most business owners are hesitant to raise prices because it comes at the risk of customer loyalty. In the current inflationary economy, everyone is expecting prices to increase so it should be a little bit of a softer blow to your customers. When raising your prices, make sure you are communicating clearly to your customers and don’t apologize for costs increasing or for delivering more value.
In addition to the cost of goods increasing in this economy, the cost of labor is also on the rise. In the past, you might have considered purchasing machinery to gain efficiencies in your warehouse but concluded that it was too expensive. We might now be at that tipping point where your cost of labor could be more expensive those machines. It’s a good time to be looking at the cost versus benefit of investing in machine automation to see if you’ll save money in the long term. This is also a great way to spend excess cash that is losing value every day that it’s sitting in the bank. In addition to machine automation, there are also plenty of innovative options for digital automation to consider.
When it comes to employing people, hire slow, fire fast. You don’t want to hang on to employees too long that aren’t working out. You want to also allocate more resources to retain your A players because in this environment, it is even more expensive to hire a new person than it was before. People that are applying for jobs now are asking for significantly more than what people are currently making in those roles. You can also offer other benefits that aren’t wage related like better benefits or student loan repayment programs.
Hedging allows businesses to lock in prices today and create stability, lower risk and increase profit predictability. If you’re using a commodity like steel, grains, soybeans, etc., you could invest in futures contracts. You will lock in a lower price and create a pricing advantage because not all your competitors are taking this approach. They’re going to have to charge more to generate the same profit. For smaller businesses who aren’t ready to engage in hedging, you can still lock in prices by purchasing excess inventory in advance. Make sure you have adequate demand forecasting before buying excess inventory.
Get creative in how you’re sourcing materials for your business and to understand if there is a product or an input that you can replace with something less impacted by inflation. Keep up to date with the inflation rate for the specific inputs to your products as well as the overall CPI and PPI indexes. Strengthen your relationships with your vendors by increasing communication and accountability.
Ask your accounting department to create a dashboard to view profitability based on SKU, Customer, and/or channel – depending on your business model and industry. You will be able to better understand where you are losing money and making money. By focusing efforts on the more profitable customers or items, you’re going to get more cash on the dollar for every sale.
In terms of financing, revisit your capital structure and talk to your bank about opening a line of credit for working capital at a fixed rate. You may also need to take out a business loan to finance capital expenditures which are cheaper now then they will be in the future. Choosing between taking a loan now before money devalues or waiting until there’s an actual need for the funding can have huge ramifications for your business so make sure to consult with your CFO or an alternative expert.
Go back to the drawing board and really focus on your core competencies. What can you do that you know you can make money on? For example, you may want to hold off on expanding your business by opening multiple locations and instead focus on expanding your business by increasing your marketing spend on the existing locations. Pivot your strategy to what you’re really good at and what you can make money doing because short term survival takes precedence over long term growth.
The inflation we’re all experiencing is here to stay. Be proactive and use the tips we’ve outlined to see how you can take advantage of the current economy and not only maintain your profitability, but increase it. Knowing where you want to go starts with knowing your numbers. If you are interested in speaking with a TGG expert, click below to get started today!
This post was reviewed by our team of accounting and financial experts. TGG’s mission is to make business owners’ lives better through excellent financial management. We strive to provide the most up-to-date and objective information on accounting-related topics so our readers can make informed decisions based on factual content. All posts undergo a review process with at least one member of our Leadership Team to ensure accuracy.
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