Dealing With Inflation
Created 2 years 121 days ago
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Management
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Use These Five Stragegies to Grow Your Business During These Times of Inflation
by Ron Ameln
Let’s face it. As a business owner, you thought you had brushed aside every challenge the business gods could toss your way. Your competitors couldn’t take you down. After sleepless nights worrying about Covid, employee issues, and supply chain challenges, you were still able to sustain the business and even grow revenues.
Then, along came inflation.
Didn’t see that one coming, did you? Who could blame you? The last time our country experienced double-digit inflation was in the early 1980’s (13.55% inflation in 1980).
The problem with inflation is simple in theory: Costs go up more than you can raise your prices, hollowing out your profit margin. Revenues can’t keep up. For example, during the first six months of 2022, one local business owner endured a 13% increase in his firm’s costs of goods sold (COGS). This increase resulted in a 6% decrease in profit. That’s a huge decrease in profit. Depending on the industry, it could be enough to put some companies out of business.
Before inflation damages your business, now is the time to act. The following are five strategies you can employ today to survive inflation in the coming months. “It’s time to take a step back and get strategic,” said Craig Palubiak, President of Optim Consulting and author of the books, Drive Profits Today and Ten Tactics for Successful Family Companies.
1. Get to Know Your Numbers
The creation of a financial dashboard or flash report is critical to knowing what is possible. It also creates predictability for guiding decisions. You can then show the management team and others how their behaviors affect the bottom line.
“Most business owners claim to know this,” says Palubiak. “But what they usually lack is the history. And they are missing out. Because creating this flash report gives your organization a common language so you can cut down on meeting time and work remotely. You can keep your finger on the pulse of your organization. You can start this process by asking yourself: what are the 15 items that are critical for measuring how successful we are in business? Getting your managers to report on those will create responsibility in your organization.”
When it comes to your financials, focus strongly on your cost of goods sold (COGS), especially during high inflation. “Second to sales, the most important information for a business owner to understand on a statement is the COGS or the cost to make your product or provide your services,” said Debi Corrie, author of Loving Failure: Getting Control of Your Business Health. “For companies that manufacture products, their cost of goods sold includes the labor and the materials to make the products. For a distributor or wholesaler, this would be the purchase price of their products, plus any freight or import cost to bring the materials or product to the plant or warehouse.”
During high inflation, it is important to control your COGS as a percentage of your sales. This can be done by contacting vendors and working on more favorable contract terms or adjusting the types of products or amounts you purchase.
2. Raise Your Prices
With your COGS and expenses growing with inflation, it is critical to raise your prices to keep your revenues in line with increases in expenses. Whatever is in your head about price increases, get over it. Remember, price should represent value. “Today, buyers have a difficult time determining the value based on the prices they see,” says Dale Furtwengler, author of Pricing for Profit: How to Command Higher Prices for Your Products. “When you have incongruities between price and value, then buyers get confused. If I tell you that an item has a $100 value, but I am going to sell it to you for $60, your reaction is going to be, ‘Well, which is it? Is it really that good? Why aren’t you charging me $100?’
When there are incongruities between the price and value, then the customer is left in the awkward position of wondering which to believe. And, what they are typically going to believe [is] the price because anybody can claim value. Human nature is to trust the lower price.
“You are not in the business of selling time. You are selling value. There are only three things that any of us sell. We sell image, innovation or time savings. That is it. You can take any business you want, and it fits into one of those three.”
Ready to start raising prices? According to Furtwengler, start by ascertaining which of your product or service offerings are generating the highest margins.
Then, identify which of your customers in this product or service offering group are providing the highest margins. Next, you determine why they’re willing to pay this premium – is it image, innovation or time-savings? Calculate the value in real numbers that these customers get that make them willing to pay the premium. Set your sales script to communicate that real number value, and then revamp your marketing to attract those customers.
Corrie said the biggest mistake she sees is owners’ setting their price for just today. “Getting your price right is critical,” Corrie said. “You want to make sure people understand the value you bring to the table. If people are just looking for the lowest price, they’re probably not your ideal customer.”
3. Improve Your Gross Margins
“There are all kinds of ways to improve gross margin,” Corrie said. “The quickest way is to go back and negotiate pricing with your vendors. You have an advantage as you get bigger. Vendors are willing to offer discounts as you get bigger because they want your business. Owners can take advantage of discounts on accounts payable bills or find out if you can get percentages off. [Bringing] activities back in-house rather than having them done outside, or vice versa, can also help. Sometimes having something done outside is more efficient than doing it yourself.”
4. Set Up a Budget
The budget is a management tool, plain and simple. Without one, owners are left to guess about pending expenses and the company’s bottom-line profit.
Every business needs a budget. Think of your budget as your plan. Each year your business needs a budget, with line items under income, COGS and expenses. A budget acts as a set of guardrails to keep you, your team and your business on the right path. If the assumptions and predictions used to create the budget are reasonable, it’s a tool for helping you achieve the projected results.
Comparing your budget numbers and overall income statement to other businesses in your industry also can be helpful. Take a look at your budget and scrutinize your expenses. Go through all expense items. Decide where you can make adjustments. Lowering some of your expenses by .5% or 1% can help improve your profit margins. Also, investigate credit card bills. Make sure recurring items are still needed and listed in your budget.
5. Stay Focused on Sales
During inflationary periods, strong sales are critical. As inflation impacts your customers’ buying power, you want to make sure you are top-of-mind for your target customers. That starts with understanding and focusing on your ideal customer.
Bottom line: Business owners need to make certain they know the profile of their ideal customer to allocate the right resources and market to them. Tom Schaff, owner of Major League Sales, says, “I believe you always build a business from strength. Know who your best, most profitable customers are and make sure they never leave. Give them your house phone, cell phone and every way to get a hold of you. Know their business issues and personal ones. Remember birthdays and anniversaries. Make them family and grow together your whole career.
“Choose to only work with those who are right for your business and value you appropriately. Low-margin, low-value clients are hard to service, rarely happy and challenge growth. Get clear on who values you, why they value you, and double down on the places you can make a difference.”