Blog

Responding to market forces outside your control is one of the trickier aspects of running a business, even more obvious today as world markets fluctuate.

While you can’t always predict a sudden change in costs, there are steps you can take to manage the impact.  While these ideas below aren’t new, they are (mostly), what I consider low-hanging fruit.

Solution one. Increase price and margin

If you’re able to raise your prices without impacting demand or the customer relationship, your problem of rising costs could be solved. Customers do understand the need to increase prices over time, though if you are in a very price -sensitive industry, try it with non-core products and services first. Your competitors will be facing similar issues.

• Reduce the cost of your raw materials, supplies, or services without sacrificing quality or service by bargaining with existing suppliers. Proactively check out suppliers who may have more competitive pricing or volume discounts. Technology costs are a good example, where they should be declining over time. Consider contracts to fix supply prices for a period.
• Reduce the need for human intervention (which is usually expensive) by automating online payments (Xero Accounting and Stripe for instance), HR management, accounting platforms such as Xero Accounting, inventory tracking, appointments and reminders.
• Switch to bulk purchases if you have the cash reserves available, it’s possible to store without spoiling and you get a decent discount.
• Invoice as soon as you complete a job, or even better, get paid immediately with direct payment. If possible collect progress payments as you go.  (And Xero Accounting now gives you the ability to take a payment against a customer invoice directly from your phone app).
• If viable, offering employees the opportunity to work from home (even part-time) could allow your business to reduce the space you need.
• Reuse and recycle everything you can. If everyone’s working towards the same sustainability goals, saving energy and reducing costs becomes easier.
• You may get a cost break on insurance, office supplies, training and education, software, or travel as an industry association or chamber of commerce member.

Solution part two. Cut

The most straightforward way to manage rising costs is to delete them. By reviewing what is mission critical, there could be several costs you’re able to remove (or significantly reduce).

Review any fixed service plans or subscriptions that you don’t need or can downgrade. Check if advertising is paying its way and beware of vanity advertising (you look good but no extra sales are generated). Download your latest cash flow statement and go through each item line by line and decide to cut or reduce. And, review your budget to actual at least monthly.

• Shortening your opening hours can save labor, energy, and maintenance costs. Before going ahead, remember to analyze the impact on customer satisfaction, loyalty, and revenue.
• It’s possible you’re making a loss from certain products and services. A mechanics garage will have a mix of WOFs, servicing, trailers, boats, heavy trucks and equipment. But one service line could be losing money. By setting up profit centers, you can better see what is contributing a lower profit margin and then by allocating a percentage of overhead to each profit center, you can better decide what is pulling it’s weight or not.
• Cutting back on staff is an option if it’s the only way to keep the doors open. Remember there are processes to follow. It should be a last resort.
• Delay buying big-ticket items if they drain your cash reserves or require debt. You may get by for a time or think of a Plan B, such as repairing, renovating, or refurbishing.
• Use a tax professional to identify claimable expenses, review your business structure, rein in costs, and minimize your tax liability.
• Use a tax professional to strategize how to spend wisely on capital assets, and how to minimize your taxes legally, over the long term.

Summary

The impact of the cost-of-living increase on businesses is significant and multi-faceted. If you have tight margins, as many small businesses do, any supplier price increase you face can be problematic. Possibly the viability of your business is at stake.

But when you know where your highest costs are, you can plan for further cost rises and have strategies in place to manage.

And, if you find yourself saying that you don’t have the time, or the know how, ask for help.  Here at Rincon Controller and Tax Services, we help our business clients to take a look at the bigger picture, and often help to guide them through decisions, planning and implementation.