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  • Writer's pictureHale Portfolio

How to Manage Rising Costs and Inflation

As we are all too aware, these are challenging times for business owners. We are currently facing the highest rate of inflation for over 40 years, dealing with increases in interest rates and soaring energy bills whilst still recovering from the global pandemic. It can make for depressing reading. However, there are several steps business owners can take to ensure they are best placed to deal with the challenges we are facing.

Where to start?

The first thing I recommend doing is identifying how exposed your business is to rising costs.

  1. Start by writing a list of every business cost you have and then consider how exposed to price rises each one is by rating each cost as high exposure, medium exposure, and low exposure.

  2. Next, consider how important the item or service you are purchasing is in terms of the impact the item has on the business (e.g., is it an essential cost that you can’t avoid, or is it something that the business could manage without in the short term?) again rating each item or service as high impact, medium impact or low impact.

  3. Place each cost in the relevant box on a matrix like the one below to identify which costs to prioritise.

  4. Focus on the costs that sit in the high-impact/high-exposure box before working through the rest of the costs in the order detailed in the example below.

  5. If you can fix any of the costs in the high/high box, such as energy tariffs then this is the time to do it to help provide certainty.

What next?

Below I have highlighted some areas which should be regularly reviewed -

  • Financial planning

As Benjamin Franklin famously said, “If you fail to plan, you are planning to fail”. Make sure to regularly review your profit and loss and cash flow forecasting (see below for more on cash). Assume that price rises are going to happen and plan accordingly.

It will be key to have financial plans that include stress testing as this will help you make informed decisions during uncertain times. Carrying out this process will enable you to identify and prepare for the worst-case scenarios by understanding the limits on your cash and resources. Consider various scenarios such as what would happen if X% of your debtors didn’t pay or went into administration? Do you have plan a, plan b, and plan c? Ensure to map out repayments of debt in the stress-tested plans. I strongly believe that this planning is key for financial peace of mind during uncertain times, but if you are unsure of where to start with this, then I can help.

  • Cash and spending

With such uncertainty, your cash flow is extremely important. Take a look at your cash situation – are there any ways you can increase your spare cash reserves? If cash flow is an issue, then I shared some tips in this article.

Are your invoices being paid on time? If not, then this will be impacting your cash flow and needs addressing. You should be proactive in talking to your customers and ensuring that invoices are sent out in good time and quickly chasing any late invoices. For further advice on how to deal with late payments, I wrote an article here.

Whilst it might seem counter-intuitive to spend money, is your business in a position to take advantage of the increased annual investment allowance? It has been temporarily increased to £ 1 million before 31st March 2023. Things to consider here would be anything that helps with future energy savings, such as solar energy panels and battery installations.

Is it viable to stock up on key supplies now? This will provide peace of mind against future price increases.

  • Processes

Can you increase productivity for example through new technology or training? Are there any processes that can be streamlined? This can be as simple as rearranging a warehouse for increased efficiencies or it could be through using technology that automates processes. I wrote a short article about AI here.

We have been able to help our clients by introducing software that has sped up their processes and frees up time for staff to focus on other things. Some examples of the software we have introduced include -

o Xero for accounting

o Hubdoc for invoice processing

o ApprovalMax for purchase orders and invoice approvals

o Wise (inside Xero) to streamline supplier payments

If this is something you would like to introduce, then please contact me and we will be happy to help. I promise you won’t look back!

  • Profit margins

With rising business costs, you are likely to find your profit margins are being squeezed. To be able to examine your profit margins, you need to have a thorough understanding of your costs so make sure these are up to date and reflect any recent price increases that suppliers may have introduced.

Are there anyways you could increase your profit margin without compromising on the quality of your product? One example could be re-evaluating your packaging to see if cost savings could be made.

  • Pricing

Take some time to review your pricing to establish if it is feasible or even essential to increase it. How confident are you that your customers would still purchase from you at a higher price?

Rather than introducing blanket price increases, consider an increase on the items that are less price sensitive allowing you to remain as competitive as possible on the items that are more price sensitive. Depending on the nature of your business, it may be possible to carry out some price analysis and customer segmentation.

Make sure to communicate any price increases with your customers and track the impact of the price increases and adjust if necessary.

  • Staff

Your staff will be facing increased costs at home and so may expect a pay rise to reflect the increased cost of living. This is a sensitive issue as staff wages will reflect a huge cost but likewise, you don’t want disgruntled employees and high staff turnover, especially given record levels of employment making recruitment particularly difficult at this time.

If you are confident that your remuneration packages are already competitive for the industry, then are there any other benefits can you offer instead of wage increases? Talk to your staff about the things they value, for example, increased flexibility, holiday allowances, private health care, gym membership, etc. (please be aware that certain benefits might result in a Benefit in Kind that needs to be notified to HMRC via a P11D resulting in a charge to both the company and the employee – contact us if you are unsure).

Ensure you communicate with your staff about the challenges the company is facing and explain that pay increases may need to wait.

  • Marketing

Whilst marketing may seem like an obvious cost to cut, if you can keep marketing your business then this will help towards increasing your customer base, help you to remain visible to existing customers, and remind existing customers of the value your company adds. So instead of cutting this budget entirely, can you revise the strategy and find cheaper marketing methods?

I hope this article has provided a few pointers on some steps you can take to help during these tricky times. Make sure to be realistic about where you are at and any help that you might need. If you need advice on any of the areas discussed, then please do not hesitate to contact me and I will be happy to help – as a part-time Finance Director, I can help your business in a flexible, cost-effective way.

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