It’s in the headlines and in the minds of every individual and business owner. Inflation. Rapidly rising costs and dwindling profit margins can leave small business owners in a difficult position. While inflation can take a toll on a small business, there are steps you can take to mitigate risks now and long term. What are we recommending to our business clients?
Don’t just sit on your hands: do something.
With costs skyrocketing, from suppliers and shipping to rent and utilities, it can be overwhelming to manage your cash flow. Our best advice: take a deep breath and strategize. If you’re using cloud-based accounting apps for your business, now is the time to dive into your data. Review your expenses. Where were they last year at this time? Where are they now? How has your revenue changed? Has inflation changed your typical buyer’s consumption pattern? Ask yourself the granular questions, and use the analytics in your cloud-accounting apps to provide data-backed answers.
If you’re not sure where to get started, enlisting the help of an outsourced CFO might be your best investment. Outsourced CFOs can help you on a temporary basis, providing guidance, updating budgets, examining profit margins, and helping you understand what changes need to be made to keep the business profitable.
Whatever you do, resist the urge to simply wait for things to go back to normal. As history has shown, periods of inflation are rarely followed by deflation.
Review your margins
How are your profit margins looking? Take some time to review your cost of goods sold, identifying where you are seeing cost increases. For product-based businesses, chances are materials have increased along with labor costs. For service-based businesses, you might be feeling a slightly lessened impact of inflation depending on the industry. Overall, the majority of businesses (and individuals) have seen a dramatic increase in the cost of doing business.
Increases in the cost of doing business will inevitably have a negative impact on your profit margin. If you don’t take the time to review your profit margin before it’s too late, you might end up underwater, seeing red.
Cloud-based accounting apps such as Xero will prove to be a business-saving tool. If implemented and used properly, your accounts will be up-to-date, accurately reflecting financial changes your business has seen as a result of inflation. You will be able to dive deeper into expense categories, and the direct costs associated with each product or service you provide. If margins have gotten too narrow, there are typically two possible solutions: reduce costs or raise prices. With financial data at your fingertips, you’ll be empowered to make the right decisions here.
Identify cost-saving opportunities throughout the business
As you are reviewing your finances, be sure to identify areas of opportunity for savings. You may see that a specific component of a product has been greatly impacted by inflation, or one particular expense has increased substantially of late. By analyzing all of the expenses associated with running your business, you may notice opportunities to save. Are you using all of the subscription services your business pays for? Are there assets that are no longer serviceable or draining cash to maintain?
Office expenses, shipping costs, travel expenses, overhead, rent, the list goes on. Is it all necessary, or are there opportunities to scale back? If applicable, continuing to operate remotely can be a great opportunity, and a savings your employees might really appreciate as well.
Do keep in mind that many business expenses are deductible on your tax return. So before you cut too many costs, check to see if you’re missing tax deductions and how changes in your expenses could impact your taxes owed come year-end. Don’t forget to track all expenses, no matter how small they may seem, as they can add up. For a detailed list of deductible business expenses, tips on tracking expenses, and examples, download our free guide here.
Don’t carry the burden of increasing costs alone
As a small business owner, you build client relationships and truly have their best interests in mind. This mindset leads many small business owners to carry the rising inflation costs on their own, rather than passing the costs onto their customers. While this may feel like the right decision in the moment, it can really hurt your business in the long run.
Without adequate profit margins, your business will fail to muddle through periods of inflation. While in some cases it is the best decision to accept a smaller profit margin, your business as a whole can not carry on with dwindling profits. Your customers that appreciate your products and services will be with you to weather the storm, and the (somewhat) good news is that it’s not just your business having to increase prices.
You may find that you need to increase costs for certain products as a result of inflation or find that a smaller price increase across the entire business may be a better option. Use the reports readily available in your cloud-accounting apps to help you make these decisions, rather than throwing out random numbers. Not sure what the best course of action is? We recommend consulting with your CPA or an outsourced CFO for additional guidance.
Have procedures in place, and review them regularly
Chances are this won’t be the first or last time you see your costs of doing business increase. It’s important to have procedures in place when the what-if scenario becomes reality. What if despite your best efforts, you continue to see narrowing profits? Having procedures, and plans of action in place to cut back spending, or incrementally increase your prices, is essential to ensuring your business is sustainable.
We go back to the first tip: don’t just wait until your bottom line is seeing red. Review your profit margins, and expenses regularly. Make minor adjustments when needed, and consult with an experienced financial expert for additional insights.
Our doors are always open
The stress of running a business during a period of high inflation can be crippling and can turn your passion into a headache. You don’t have to do this on your own. Our team of CPAs, outsourced CFOs, and business cloud accountants have the experience to help guide you through these turbulent times. We approach our clients with a team method, using the various strengths our staff members bring to the table to ensure our clients receive the highest level of guidance and support. If inflation is getting to you, and your business, send us a message to schedule a consultation. Your business success is our top priority.