Inflation: What You Can Do To Safeguard Your Business
Inflation: What You Can Do To Safeguard Your Business
It has been an interesting start to the year for business owners in Australia. If you are feeling some pressure, rightly so. It’s important to be cognisant of the storm brewing around you if you are going to take a proactive approach to growth and business management.
As it stands today, the Australian economy is battling with increasing interest rates, with more hikes to come over the next few months. Government stimulus, which has underwritten the economy during the pandemic, is now falling away. Home prices have stalled and with the fear of mortgages coming under pressure, and there has already been some indications of consumer spending stalling.
Wage growth places additional pressure on business owners who are scrambling to find skilled workers, and yet most economists say that consumer pricing increases are outpacing the wage rises.
Added to that, the Russian invasion of Ukraine has seen more pressure placed on the economy with fuel prices and wheat prices soaring leading to a spike in pricing for food and energy products.
And then we have the natural disasters devastating families and businesses across Australia.
It’s a lot to take in, and you would be forgiven for thinking it is all very bleak right now. But we are not here to scare you into desperate measures. As always, our intention is to provide you with the best resources to help you succeed on purpose. To help you see that there are ways to safeguard your business and come out on top when the storm passes.
In July last year we recorded a webinar discussing inflation forecasts and what you need to know for your business about pricing and profit margins. Now, 9 months on we have seen these forecasts come to fruition. You can watch the replay HERE.
There were some very practical insights, which employed 9 months ago, will have set you up to be in a more confident position right now. If you missed it, or are behind the eight ball, here are some of the ways you can safeguard yourself against inflation and create a firmer base for your business this year.
Understand the unit economics of your business
Very few SMEs have a good understanding of how their business operates from a financial point of view. As Dan Belcher mentioned in our webinar ‘Inflation is Coming’,
“We would see close to 800 Different SME businesses per year as part of our origination efforts. And I am consistently surprised that people who have been in business for 20 plus years how little they actually understand about the underlying economics of their business.”
You need to take the time to understand what elements of your cost structure are fixed, and what elements of your cost structure are variable. You need to review right now the areas in which you are seeing inflationary pressure coming through currently, and where you're anticipating that it is going to come through over the next 12 to 18 months.
For example, as mentioned by Dan Belcher in our webinar last year, did you know that if there is a 5% increase in your variable costs, on average, it will decrease your operating profit, to the tune of about 25 to 30%, if left unchecked?
Habits such as discounting, which have become commonplace since before the pandemic to stimulate cashflow, will become a massive issue during rising inflation also. Customers become used to discounts and refuse to pay full price. Then, if you combine this with an increase in your variable costs, then you can really find yourself in a real margin squeeze, unless you've got a genuine understanding of your economics and know how to remedy this.
There needs to be a greater level of awareness and education and accountability within your business. It is critical for business owners to just be across their unit economics, on a relatively real time basis. We work closely with our clients to ensure that this happens monthly. They may struggle with the commitment initially, but over time it is one of the most valuable things we get feedback on when we survey our Governance and Advisory clients here at Nine Advisory.
Evaluate your supply chain and restore inventory levels
Many people during the pandemic ran down their inventory to increase cash flow. Now with rising costs of goods and energy it is more important than ever to restore your inventory and do a thorough evaluation of your supply chain. This includes:
Have a conversation with your suppliers and work out how you can better partner with them to benefit both of your businesses. Develop deeper relationships with suppliers and strategies ways to engage them differently to support them with inflationary pressures.
Diversify your suppliers. This is especially important if you currently have single-supplier dependencies.
Review long lead time suppliers which will become more of a risk to your supply chain as well as be subject to increasing fuel costs. Look for local opportunities.
Review the next 12-18 months and how your supply chain will affect your ability to operate at full capacity and additionally how it will affect your cost structures.
Employ Strategies in Order To Pass on Price Increases To Clients
Firstly, have a conversation with your customers to really understand what it is they value about your product or service. Harness the areas that add a lot of value and maximise this throughout the buying cycle with things like enhancements, bundling or unbundling. Really understand your competitive advantage along with the areas of your business where you could cut the fat with little impact on your customers’ satisfaction. Open up your targeting and consider how you can target customers that are less price-sensitive. Optimise things like good customer service, contract lengths, variable pricing models and complimentary add-ons.
Warren Buffet was quoted saying, “The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business.”
During times of inflation, the bottom line is you have to have the confidence to be able to pass the increasing costs onto your customer.
Simply, we are encouraging you as a business owner to prepare for inflation. No matter what industry you are in, at some point you will be affected. Meet regularly with your advisory team to review your business economics and strategic plan. If you do not have a strong advisory team currently, please get in touch to talk through how we can assist you.
Note: The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
