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As the US economy ramps back up, small businesses are feeling the effects of inflation, tight cash flow and hiring challenges. We’re taking an in-depth look each of these with a fresh perspective from TGG Founder & CEO, Matt Garrett and what steps you should be taking right now to maintain your profitability.
Right now, small businesses should be using their Paycheck Protection Program (PPP) money and other government funding to improve their terms with the vendors. While this reduces cash flow in the short run, it improves profitability in the long run.
Take advantage of the cash that you’ve been given by the government and use it to get early payment discounts, buy in bulk or secure your supply chain. These are issues where you might not otherwise be able to get something, but now you’re going to step ahead of them because you’re going to pay in advance. Ultimately what you want to do is focus on profitability because any discount you can get is going straight to the bottom line. If you can use your cash to better advance the opportunities of profitability, then dive in and do it.
If your small business is hiring, consider raising your wages along with accountability. What you’ll find is a “C” player is always going to be a “C” player, but an “A” player wants to win. “A” players want upward mobility and flexibility. Ask yourself, what sort of flexibility and freedom can you give to your workforce? It’s not always possible in every business. For example, manufacturing work must be done on site, but can you give your employees flexible work hours? One option is allowing employees to pick their hours versus having a set schedule.
Do you also need to have the same number of people that you did before the pandemic? For example, McDonald’s recently raised their wages by an average of 10% to attract more workers. However, the typical McDonald’s restaurant uses 35% less employees than it used to pre-pandemic. It shows that you can raise wages by an average of 10%, but if you cut 35% of the people needed to do the same work, you just made money. It’s not an absolute expense, but when you pay more, you need to get more, so think about how you can improve efficiency and effectiveness of your business.
Inflation is the natural rising of prices and sometimes it rises faster than others. Last week, the Consumer Price Index issued a press release about how inflation was rising right around 5% over the last 12 months. The week before that, the Producer Price Index, which is inflation coming from manufacturing and other business activities, was raising at 4.2%. If inflation is going up at 4.7% and you haven’t increased your savings, your interest rates, or your absolute net worth by greater than 4.7%, then you, as an individual, are losing purchasing power.
What does this mean for you if you are a small business? The exact same thing. If prices are raising at 4.7%, the question you need to ask yourself is, did you raise prices on your products or services at least 4.7% over the course of the last 12 months? Because inflation appears to be gaining steam. The Federal Reserve and economists are talking about transitory inflation which means that the inflation we’ve been experiencing is temporary. It’s going to increase and then go right back down. However, if you look the cost of food, the cost of cars, especially used cars being up 29%, this is unheard of. Does this mean that next year, all of a sudden we’re going to drop 29%? No. That’s just not something that is reasonable so some of this inflation will be transitory, however some of it is going to be consistent and on a curve that’s going to stay here for quite a while.
You need to think about what you’re doing in your business to make sure you don’t fall behind. You don’t want a situation where all the goods and services that you’re buying are going up and you’re not raising prices to accommodate for them.
Every single month, you need to start looking at your pricing and look into your cash flow forecasting whenever possible. You need to be doing a pricing analysis and what we call a three-scenario analysis. An A, B and a C to see if you raise prices this much what’s going to be the impact on revenue? If I raise them by this amount, what’s the effect going to be? We’re all afraid of raising prices because we want to serve our customers at a fair price. We also have to make sure that we’re still making the profits we’ve made in the past, and if our profits are eroded through inflation along with our ability to buy things, then we’re not ultimately serving the mission of our business.
Here’s an interesting and astonishing fact that’s important to understand. If you raise prices by 10% for a typical business, you could lose up to 24.9% of your customers. Think about who your customers are and whether they really appreciate what you’re doing. You might have to raise the level of the product or service you’re providing, but you also need to strongly consider raising the price in order to maintain that profitability.
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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