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  • Writer's pictureJoe Minich, CPA

2022 Inflation Playbook for Small Businesses




Many of the recent conversations I've had with business owners and executives have centered around the"I" word. It's on everyone's mind. I called my grandmother and she brought it up before she asked about my kids. In fact, multiple small business polling indexes report it has eclipsed the pandemic in general as the biggest concern to small business owners. How bad is it? How bad can it get? How do I navigate it in my business? It's a scary topic.

Why are we here?

Economics, supply chain, politics, pandemics, yadda yadda. In the end, the why doesn't matter. We're accountants and business owners, we'll leave the why for Fox and CNN to duke out. It is here, it is real, and businesses that are slow to respond are in peril. After nearly four decades of low inflation, prices are creeping up at alarming rates. It is not going to abate in the immediate future, it will probably get at least a little worse, and we are laser-focused on helping our clients navigate it.


A lot of moving parts

What's shocked some people we've talked with is how complex and fast-moving the whole situation is. There is no single catch-all to conquer inflation as a business owner. It's a war fought on many fronts. It touches every aspect of the business. Pricing strategy has to be addressed. Labor costs and overall talent acquisition and retention paradigms are shifting. Owners need to assess their balance sheet and liquidity for risks and opportunities. There's no better time than now to adopt more efficient technologies and retire legacy administrative systems. The businesses that come out strong on the other side will adopt a comprehensive approach to staying in front of this inflation surge, or at least, responding as timely as possible.


Supply chain issues

We've seen clients struggle and even find it impossible at times to source equipment and parts, leading to lost revenue opportunities and dissatisfied customers. This of course is nothing new and has been going on since the beginning of the pandemic, but it's becoming clear we can expect shortages and price increases to continue well into 2022. These tend to be somewhat different in character in general, but some of the strategies to combat it remain the same.


Supplier Flexibility

Business owners should always have a risk-based mindset, but it is especially critical to adopt this approach in times of uncertainty. Take a look at your suppliers and think about where problems could arise. Sole source providers are a big risk. It may be worth working with a few different vendors so you have redundancy, even if your margin takes a hit by losing out on quantity discounts or exclusivity deals. If opportunity exists to stockpile a reserve or lock prices into contracts, it's certainly worth exploring. It's key to be able to run the analysis, or work with someone that can, to chart out the best course.



Labor costs, talent acquisition, and retention

We all know at least part of the story by now. A confluence of factors has driven up labor costs, all the while increasing employee expectations of remote work and flexibility. The labor market is what it is. You have to keep up or stay ahead or be prepared to get what you pay for, simple as that. Smart employers see opportunities arising from shifting paradigms surrounding remote work and flexibility. Employers that bemoan change and dig their feet in the sand will be left behind.


This can be a touchy subject, and I was initially with the old guard in preferring to work face-to-face with my colleagues. I still do, and I think the key is empathy and flexibility. I've come around to see a lot of value in having remote work at least an option to mix in. I see a lot of people that are happier and do better work from home, even if it makes me grouchy and prone to distraction. And that's fine, we're not all the same.


I think at the end of the day, you have to really assess what works for your company, and maybe put yourself outside your comfort zone when it comes to supervision and trust. If you do as much as you can to truly position your company as a great place to work and keep your people happy, a lot of other things will fall into place.


Pricing

Some business owners we talk with have a crippling fear of raising prices, losing market share, and not hitting their sales goals. In times of inflation, it's just not a viable strategy. Other businesses are raising their prices too. It's not going to be an automatic sales hit as many fear. It is possible to raise prices and gain market share. Remember, the economy is flush with cash right now, which is one of the reasons we are here talking about inflation to begin with. What business owners need is an intentional strategy and excellent messaging when it comes to price increases.


Communication is important. Leverage your CRM, and work with your sales and marketing teams to craft messages to keep customers funneling through the pipeline and returning even as prices have to increase. If you are transparent and fair they will understand. Even if they shop around and jump to your slower-to-respond competitors, you'll win them back soon.


Some creative approaches can help absorb price shock. It's time to examine the work itself and if there are ways you can do the same work more efficiently, or provide more value to the customer at the same cost. Some companies are moving from cost-plus pricing models into value-based pricing by repositioning their product/service or finding niches in which they can specialize. Subscription-based pricing is certainly a hot trend and working in industries we never would have imagined it makes sense. Some industries can experiment with 3rd party payers in new ways to grow revenue. Times like these call for innovation.


At a minimum, you need to be tracking your costs in greater detail and frequency and finding a way to maintain your margins. This is no time to be making gut decisions with your pricing strategy.


Doing more with less

Cutting costs without harming the business is always good for the bottom line, and sometimes it is the only path forward in challenging times. Effective cost-cutting is a lot more than trimming the fat. It is reexamining fundamental aspects of the business and seeing where there are opportunities to do things differently. Do you really need all the space you are renting, or can you renegotiate your office lease to downsize a bit? Is your administrative function bloated and still doing things like it is 1984? Can you outsource things that fall outside your businesses' core competencies like accounting, billing, payroll, and human resources, to name a few?



Spending money to save money

While every company still needs to maintain an appropriate cash reserve, many of the strategies to effectively fight inflation require investing some capital in the present. It's an unfortunate reality and one that will sink some businesses that are already financially unhealthy. Unfortunately, many small businesses have significant cracks that lie beneath the surface, still hidden by the dwindling PPP lifeline. Many of these cracks are going to be exposed, and we are going to see some serious struggles as we get deeper into 2022.


Sitting back, keeping prices low to hit sales goals, and failure to innovate will only doom a business into a negative feedback loop that is all but certain to end badly. That cash you're stockpiling? It's worth less and less by the day. Those prices you don't want to increase? They have to go up eventually, and it's better to lose a few customers now than lose them all when you finally see your profit margins trending toward the red. Stubborn about paying employees what they want? Well, don't be surprised when they jump ship to your competitors and you're left wondering why you can't recruit qualified talent at a 25% market discount.


Finding the cash to make the right moves

If there is one undeniably positive opportunity with inflation, it's that borrowers win and lenders take a bath during inflationary times because the money borrowed today is paid back in the future when it is worth less. Financing can seem scary and risky in such times of change, but is one of the fundamental strategies companies large and small can use to conquer inflation. Work with your advisors and banking network to determine if your balance sheet and credit score are healthy enough to take on some financing to help shore up other areas of the business and balance sheet. It can be a good time to fund equipment or inventory purchases, or expand into new lines of business, among other things.


Build accurate financial projections and keep a close eye on key indicators and ratios

With so many moving parts, it is imperative to build accurate projections and stay on top of them. You need to identify key indicators, and be able to track them at high levels as well as drill all the way down into products, jobs, and employees. The projections will need to be updated frequently to stay on top of changes and ensure you are viable and profitable or have a quick path back to profitability if you have to take a temporary hit. If your CPA or bookkeeper isn't helping you with this key executive planning and analysis now, find one that does.






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