As we come out of the Pandemic small businesses are now faced with the challenge of rising prices as inflation is projected to reach 5% by April. The economic sanctions applied to Russia following the invasion of Ukraine are also going to add more challenges in terms of rising costs.
So, what can small businesses do to shield themselves from these economic changes?
It’s more important than ever to monitor your spending and your income.
Where is your money going and what is happening in terms of your income?
Any reductions you can make in expenditure can be set against any strategies you can use to increase sales of your products or services.
Recognising that your customers are having to “tighten their” belts is the first step in identifying how you can continue to bring quality possibly by changing price points or by creating additional services or products.
Differentiate between strategic and non-strategic spending,
The knee-jerk reaction is to simply cut expenditure. However, cuts made now that are likely to damage your long term strategy will prove to be a false economy. Often training and marketing budgets are the first to be cut in an economic downturn, but the question needs to be asked about how this will affect your long term goals.
For example, American Airlines in the last “financial crisis” resisted the temptation to cut these costs. They invested in re-training personnel whilst maintaining a positive presence in the media. The result was that they were in a stronger position to hit the ground running when the situation changed.
Consider what skills you and your team will require for the future and find ways of preparing for them.
Automating Processes
Think about any processes and procedures that can be automated. In offices, there are numerous processes that are labour intensive and a number of these can be automated. Doing this will mean that people-hours can be invested in development and future-proofing your business.
As noted in the Harvard Business Review
….workflow, and intelligent document processing can free up workers and make each person much more effective at creating value. At retailers, for example, important associates often spend too many hours, days, and weeks manually inputting item and product data (e.g., case size, pack size, dimensions, website images) when they could be working on more strategic activities, such as analysing data and generating insights. (Harvard Business Review Sept 2021)
Playing the “What if ….” Game
Many small businesses are forced to be reactive when it comes to changing economics and markets. This means that they find themselves chasing whatever downturn there is in the market.
But, if some thought is put into using financial forecasting to a “what-if” scenario, to test the potential impact of inflation, such as:
Wages increases of 25-50%
Raw material prices doubling
Supply chain disruptions causing 25% or greater revenue delays and inventory build-ups
Anytime you are forecasting what-if scenarios, you need to answer the following tactical questions:
Will I have enough cash in all scenarios?
What evasive maneuvers will I take in each scenario?
Can I manage risk now with preventative measures?
What metrics will I watch as leading indicators that one of these scenarios is occurring?
Such risk assessment based thinking means that you are not ‘chasing’ an economic downturn but “racing” it, keeping ahead of the curve.
When it comes to your Company’s accounts and tax returns. GW & Co Ltd, offers Fresh Thinking, Friendly Advice for Your Business Success. If you’d like to talk about the issues raised in this article or any other accounting challenge facing your business, please do not hesitate to get in touch.
Tel: 01326 378288
Email:info@gw-accountants.co.uk
