3 strategies to protect your profits from inflation
6-minute read
Rising energy costs, talent shortages, geopolitical conflicts and supply chain disruptions have driven up the cost of doing business. And while general inflation may be slowing down, the prices of many products and services are continuing to rise at a faster pace. As a result, business costs are likely to remain volatile in the foreseeable future.
With the right strategies, however, entrepreneurs can not only protect their profits but also foster sustainable, long-term growth. Indeed, despite cost-related headwinds, the current economic environment is rich in opportunities for business owners who are up for a challenge.
The key to survive and thrive lies in striking the right balance between cost-consciousness and investing in growth.
Investing in software and technology has the potential to increase your revenues faster than your costs. And while certain technologies remain costly, many are accessible to SMEs.
Here are three fundamental strategies you can use to achieve this delicate equilibrium.
1. Ensure solid financial management
To protect your profits, know your numbers. Two types of analysis, in particular, will help you gain a better grasp of your company’s financial health.
- Costing—Undertaking a costing exercise will help you attribute accurate costs to each of your lines of business, products, services, projects and accounts. It will show you which activities are making money and which ones are generating losses. That way, you can focus on the money makers and re-evaluate the rest. Having this information will help you determine whether to accept or decline a contract, increase or decrease your prices, or drop a client, product or service. Doing a break-even analysis—finding the sales level required to cover all your costs—will further improve your financial decision-making.
- Financial forecasts—A big new contract can be appealing at first but it can put you under quickly if your free cash flow isn’t strong enough to support it. To make sure you understand the impact of your business decisions on your future costs and profits, you should prepare a cash projection of at least 6 months, but ideally 12 months, and prepare a three-year forecast of your income statement, balance sheet and cash flow. These tools will allow you to do some extremely valuable “what-if” analysis. For example, what if you sell only half of what you project? What will be the impact on your costs, financial performance and cash? What can you afford in terms of R&D for new products or services that may not be profitable yet?
2. Embrace technology for efficiency
Investing in software and technology has the potential to increase your revenues faster than your costs. Whether it be process automation in the office, or physical automation in the plant, this promising avenue can increase output per person while improving quality and consistency. And while certain technologies remain costly, many are accessible to SMEs.
Starting with processes, a number of them are easy to automate. Marketing-related tasks are one example: as many as 80% of top-performing companies are using marketing automation tools for generating leads, promoting e-commerce, customer service and engagement and events management.
Here are a few more processes that are simple to automate and would make a great starting point:
- Invoicing
- Client relationship management
- Inventory management
- Automatic purchasing
- Sales order and invoice processing
- Reporting
When it comes to physical automation, don’t assume it’s only for large corporations with deep pockets. Smaller businesses are benefitting from machines that do a number of tasks, like box erection, packaging, palletizing, material handling, welding and assembly. And the options are more financially accessible than they used to be.
Even though SMEs will sometimes offer fewer benefits and less money, they can make talented individuals feel seen and heard in a way that is impossible in larger corporate environments.
Pursue decarbonization
Decarbonizing your business can be a profitable proposition: companies that adopt new technologies are 4.4 times more likely to grow and those that also manage to reduce their carbon footprint are 7.7 times more likely to grow. A good place to start is to invest in energy efficiency.
More broadly, going green is important because big industry players are preparing for new Environmental, social and governance (ESG) reporting requirements. As a result, they are increasingly passing on ESG performance requirements to their suppliers through a practice called sustainable procurement. Having better environmental practices will therefore secure an access to wider markets for your business.
Reviewing your building, sourcing and distribution decisions can also be very powerful exercise in reducing your cost. Additionally, a real commitment to ESG is a powerful way to distinguish yourself from your talent competitors and helps to attract and retain quality employees.
3. Foster a strong company culture
Talent is costly. More so now that wages have risen as a result of the labour shortage. Having a strong, positive company culture will support your talent strategies without necessarily having to offer more money or incur the high cost of turnover.
It is an unfortunate truth that many entrepreneurs are neglecting their company culture. However, it can be a powerful and valuable bargaining chip when it comes to attracting and retaining talent. And when it comes to culture, small businesses may be at an advantage: many people actively choose to work for a small or mid-sized company over a bigger corporation. The reason is simple. Even though SMEs will sometimes offer fewer benefits and less money, they can make talented individuals feel seen and heard in a way that is impossible in larger corporate environments. Make your employees feel that they are instrumental in helping build something valuable. Offer an attractive mission and inspiring values, as well as close proximity to you, your leadership team and your clients.
So work on your employer value proposition. Find out what people want—whether it be learning opportunities, career development or flex-time—and devise creative ways to build it into your culture.
What’s important to note is that all these benefits are within your control and cost little to nothing in real dollars. As a business owner, it is crucial to reflect on your nature as a boss and your ability to create this kind of space for your employees. It might be the best and cheapest investment you make.