You’ve only got to pick up a newspaper or listen to a news bulletin to know that costs are rising significantly at present. A combination of supply chain issues, pandemic recovery and global economic factors is creating a set of complex circumstances.
How do you deal with this in your business? There are probably three things to consider:
Watch Your Input Costs – business owners need to watch input costs like a hawk, especially on the larger headings in your profit and loss. For example our mobile phone/data provider,Vodafone, has increased prices by CPI of 5.4% plus 3.9% – 9.3% in total – needless to say a large number of our contracts have been moved to Three at around 1/10th of the cost.
We’ve all seen the spectre of rising energy costs. Our response to this has included finalising the installation of Solar Panels, new more energy efficient heating, led bulbs, electric sub meters on high use circuits, and individual appliance monitoring – use is around 25% down before the benefit of solar, which saves cost and is environmentally friendly as well.
In your business the variables will be different, but time monitoring costs is never wasted, with the caveat that reducing costs is a reducing benefit option – it gets increasingly more difficult over time.
Keep an Eye on Pricing – with relatively sluggish consumer demand, many businesses are tempted toward price discounting. Be careful with this, especially with rising costs. Remember the old adage, “turnover is vanity; profit is sanity; cash is reality” – whilst loss leading can have benefits, in the long term you need to cover costs and make a return on capital and proprietors’ time.
Likewise not passing on inflationary pressures to customers equates to a price cut, and becomes increasingly unsustainable.
There are no easy answers here, and every business will have a different pricing strategy. However don’t neglect this.
Budget and Monitor – all but the very simplest businesses benefit from a budget and regular actual to budget monitoring. Your accounting software may help you with this, but the budget reporting can be inflexible. To do this properly you probably need to export your data to a spreadsheet to manipulate it – with a note of caution that spreadsheet errors can be a major cause of losing track of business finance.
You may choose to monitor monthly or quarterly, but its important its a regular part of your business process.
And what should you monitor? At the least most businesses will benefit from an annual budget with a comparison of year to date actuals to budget, and forecast out-turn. You may also want to review income sub budgets and ratios like gross profit percentage. Project based businesses will benefit from similar project level monitoring. Make sure it works for you, is effective and not overly complex – overly complex processes tend to be the first to be dropped.