3 tips to adjust your business’s financial plan to inflation
There’s no doubt that inflation is everywhere these days — gas prices have skyrocketed, the prices of raw materials are at astronomical levels, and the costs of grocery items like produce, meat, and bread have shot up. People everywhere are struggling to stay on top of their bills and other monthly living expenses, and many businesses are having a difficult time maintaining their ever-increasing operational costs. It has been a stressful situation for companies that have already been struggling due to the COVID-19 pandemic.
Has your enterprise also felt the negative effects of inflation? Are you wondering how you can maximize your business’s financial health during this difficult time? In my experience as the CEO and founder of CMA Exam Academy, a certified management accountant exam review program, I have discovered many ways businesses can adjust their financial plan to inflation. Here are three proactive measures all company owners should take to combat inflation.
Fine-tune the prices of your company’s offerings
Take a long look at your own operational and/or manufacturing expenses — has the cost of your contractors’ labor gone up? Have the skyrocketing prices of raw materials made it a lot more expensive to produce the goods your business offers? Is the cost of shipping your items to customers higher than it has ever been in the past? Well, if you are currently dealing with any (or all!) of these scenarios, it would be in your best interests to adjust your product/service prices to account for labor and production cost increases stemming from inflation.
Because your production costs have gone up, it is vital to adjust your selling prices accordingly. This will help you maintain the same profit margin level that you had before this era of inflation. To do this, calculate the exact percentage that the cost of producing one of your products has gone up by. Then increase the price of that finished product by that same percentage. If your business offers various products at different price points, calculate the production cost percentage increase of every product and adjust its sale price accordingly. This should help you offset rising business costs so you can maximize your profit margin and maintain the same level of quality of your services/products for your customers.
Purchase raw materials in bulk ASAP — don’t wait!
Do you have to purchase wood, metals, and other raw materials to produce your business’s goods for sale? You likely purchase these items in bulk on a regular basis, such as biweekly, monthly, or quarterly. Well, consider buying these items in bulk today or as soon as possible, rather than wait for your next scheduled purchasing cycle. This is because inflation on these items could continue to increase for the foreseeable future. So, if you buy your raw materials in bulk as soon as possible rather than waiting, your company will limit the impact of inflation on the overall cost structure of products/services offered to customers.
Think about it — say you regularly purchase $10,000 worth of raw materials on the first of every month. And from now until next month’s purchasing cycle, inflation causes the prices of all the raw materials to go up by 7%. That is an increase of $700, which could have been put toward new marketing initiatives to help you sell more products. If your production costs increased by $700, then you would have to increase your products’ prices accordingly, which could cause you to potentially lose customers. That all said, if you purchased your order of raw materials in advance, you wouldn’t have to incur the $700 inflation-induced price hike.
Account for inflation in all financial projections
As a company leader, you likely make financial projections and estimates on a regular basis. This is critical for planning ways to increase profits and improve your overall bottom line. There are so many elements to plan for, such as the total estimates of every project and the prices of producing the products and services you offer. You likely also make a projection of your total profit margin each quarter, which allows you to plan ways to increase the profit margin of the next quarter. Therefore, make sure to account for inflation in these estimates!
If you don’t account for inflation in your projections, you can be grossly underestimating your total costs, which will lower the profit margin you were planning to achieve. If your production costs’ inflation has been steadily increasing for months, it is safe to say that this trend could continue into the future. So, take this into account when you make estimates for upcoming project budgets, other operational costs, and target profit margins.
Cash flow estimates
Cash flow is incredibly important for every business owner, as it depicts how much cash their enterprise is earning and spending in a specific timeframe. Company leaders need to consider how inflation will impact their cash flow projections and its buying power so that they can more accurately project their cash needs. Also, cash is considered a business’s most liquid asset — company leaders will first check their available cash when they need to make urgent purchases, pay an invoice, handle payroll, etc. — this prevents them from having to take out loans or pursue other funding options.
Therefore, it is pivotal to project cash flow to ascertain how much cash will be available on hand at a moment’s notice. Make sure to account for any current and future inflation to have the most accurate picture of your business’s cash flow. If you don’t include inflation in your projections, you can greatly overestimate the buying power of your cash on hand. This can cause you to make ill-informed business decisions that can spiral into financial struggles down the line.
To wrap it all up
Inflation is currently plaguing so many businesses, but there is no need to fret over it wreaking havoc on your own enterprise’s operations and financial health. With proactive planning, you can continue maximizing your business’s bottom line in this era of inflation. Make sure to adjust the prices of your business offerings to account for labor and production cost increases. Also, buy bulk raw materials as soon as possible rather than waiting for your next purchasing cycle, and account for inflation in all financial projections. Taking these measures will help you and your business rise above any inflation-induced cost increases and thrive in the long run.
Nathan Liao is the founder of CMA Exam Academy, a certified management accountant exam review program.
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