August 28, 2023

Ana Marinkovic: Why you can’t afford to ignore inflation

Rising costs are having a big impact on small business owners. The good news: there’s lots you can do to stay one step ahead.

Australia’s small business owners are vulnerable in today’s inflationary environment.

That’s why it’s essential they stay in front of the next price hike – embracing short and long-term strategies to protect their balance sheet and bolster their chances of success.

Understanding the challenges

Not only do small business owners face higher prices in their personal lives – in their own grocery bills, in their own mortgages – they must also deal with the rising costs of doing business at a time when customers are thinking twice about their own spending.

The reality is that labour, energy, logistics and supplies have all become more expensive over the past 12 months. Yet small businesses don’t have the economies of scale that larger companies do to adjust their operations and absorb these additional costs.

Typically, they have less bargaining power with suppliers and can find it far harder to negotiate favourable terms. They also have less flexibility in their pricing.

In fact, many small businesses will forego a price increase for fear of losing customers. Or simply because they don’t want to be disloyal to the people they’ve known for years, even decades. They know only too well that customers are also struggling just now and will hesitate to make things harder for them.

Finding a happy medium

The problem is, customers aren’t always able to remain loyal themselves. As the cost of living continues to rise, they are inevitably becoming more cautious about their spending habits and are actively comparing prices, seeking discounts and making more deliberate purchasing decisions. Many are opting for lower-cost alternatives or delaying non-essential purchases.

It’s not surprising. But it does mean small businesses have to make some difficult decisions – or risk the viability of their business.

Take one of our Western Australian clients. They’ve had a highly profitable manufacturing business for many years, with a turnover of around $10 million. Yet when I visited them recently, they were running at a loss.

The demand for their goods was still very much there. But when I looked at their balance sheet, it became apparent that the cost of all their inputs – their raw materials, labour, the servicing of their machines – had increased significantly, even as they kept their prices unchanged.

The pricing dilemma

While the solution appeared straightforward, it wasn’t at all.

Our client had done well from offering lower prices than their competitors and they didn’t want to lose that advantage.

They also weren’t clear about what an appropriate price rise should be. One of their inputs had risen by 50 per cent, another by 20 per cent, yet another by a more manageable three per cent. It was difficult to know how to pull all this together and price their products appropriately – in a way that would protect their customer base and return them to profitability.

Knowing which triggers to pull when

Of course, adjusting your prices is only one solution. It takes a multifaceted approach to combat inflation.

First and foremost, you need to assess your supply chain to identify cost-saving opportunities. It may be that you can renegotiate your contracts with suppliers for better terms or optimise internal processes to reduce waste and inefficiencies.

You might also want to consider diversifying your product or service offerings to capture a broader customer base.

However, you do also need to bite the bullet and review your pricing strategies to ensure they meet the increase in costs – sooner rather than later.

True, your customers aren’t going to appreciate paying more. But there’s every chance they’ll understand if you’re careful about your communication – if you explain why it’s needed, and why the value of your products or services is still a worthwhile proposition.

Our Western Australian client had put things off a little too long, so finding the right strategy was challenging.

They needed to increase their prices, but when and by how much took some technical know-how, as well as an understanding of their market and their customer base.

It also required the guidance of a communication specialist. Business coaches can be a wonderful resource here, as can your local chamber of commerce.

Thinking long term

Getting on top of inflation doesn’t stop there though.

While it’s difficult to consider the bigger picture when you’re working to keep your head above water, it’s important to focus on long-term strategies as well as short-term measures. That way, you can future-proof your financial position beyond the next month or year.

For instance, it’s a great idea to invest in workforce training and development. Enhancing your employees’ skills and productivity will put your business in a fundamentally stronger position.

It’s also worth exploring digitalisation and automation to see if you can further streamline your operations.

Plus, you’ll want to consider contingency plans to mitigate potential disruptions. Building cash reserves and establishing lines of credit can provide a buffer during periods of economic uncertainty. It also pays to foster a strong network of industry peers and mentors who can provide valuable insights and support in navigating challenges.

Reaching out to others is always valuable. Your trusted business partners, suppliers or mentors can give you perspective or ideas about the best ways to move forward.