Your business has faced a lot of financial challenges over the last couple of years and just when it looked like things were starting to ease, we’ve got sky-high inflation. Here’s the good news: With the right strategies, you can grow your business even when inflation is high! Even now, there are opportunities to strengthen your business’s financial management and operations and to increase your profitability.
These proven strategies are easy to implement, low-to-no cost, and will help you rebalance expenses, reduce financial waste, and clear the way for new opportunities.
Finding opportunities during times of high inflation
Over the last few years, we’ve seen record-high inflation that’s slowly started to fall. Because inflation is the rate of growth of in prices, not the absolute price of goods and services, all the inflation we’ve experienced over the past three years is baked into the price of everything – and will be forever. So, no matter what industry you’re in, you’ll see the impacts of the current financial climate in just about every facet of your operations.
Your competitive advantage lies in finding the opportunities within the challenges. Use these proven business growth strategies to help your business get stronger now and set the stage for long-term success:
1. Understand your costs to identify opportunities
You should always have a clear understanding of costs and how they relate to your average-transaction value (ATV). This is the amount, on average, that your customers spend on each purchase of your goods or services. You can calculate the ATV for your business by dividing total revenue for a set amount of time by the total number of transactions you had during that time.
For example, if your business had 10 transactions and $1,000 in revenue in a day, then your average transaction value is $100. Similarly, if you had 1,000 transactions and $1,000 in revenue during that same period, customers are spending $1 per transaction. This amount can change regularly and varies significantly based on what you offer, so make sure to track your ATV regularly for the most accurate snapshot.
Calculating ATV is useful when determining where to make adjustments that will either increase profitability or help you absorb some of the increased costs from high inflation. It can also help you find opportunities for add-on goods or services that can boost your bottom line.
Using the earlier example, let’s say the average bill at your restaurant is $100. When you opened a couple of years ago, it might have cost you $40 to make that $100 (netting you $60 in profit), but now, it costs you $60 (netting you only $40 in profit). With this number you can calculate your margin: $40 of profit on a $100 purchase means that there is a 40% margin.
Now, you can begin to determine whether there are costs that can be reduced or eliminated and/or prices that can be raised to regain your lost profitability.
A regularly updated profit-and-loss (P&L) statement can also help you spot these opportunities. Once you’ve done this calculation, divide up your offerings into those with a high margin (above 50%) and those with a low margin (under 50%).
Low-margin offerings are the most sensitive to inflation. This is because a 1% increase in costs on a low-margin offering eats up more profit than a 1% increase on a high-margin offering.
It’s also easier to fix pricing problems on a high margin offering. A 1% price increase on a high-margin offering raises profits more than a 1% increase on a low-margin offering.
Simply put, in times of inflation you should try to push segments of your business that have higher margins, and focus more attention on lowering costs for your low-margin offerings.
2. Identify strategic and non-strategic costs
Focus your attention on costs and identify those that are strategic and non-strategic.
Strategic costs can be used to bring in revenue, increase profit, or help you meet short-term goals and contribute to a solid financial foundation. Non-strategic costs are the “nice to do” things that don’t necessarily contribute to the bottom line today but may have a positive impact on your long-term goals.
In inflationary times, strategic costs drive your higher-margin offerings, and non-strategic costs drive low-margin or unprofitable segments.
Let’s use the example of a toy store, With this business, carrying an inventory with a range of popular high-margin toys is a strategic investment. You need to sell toys to attract and retain customers and generate revenue. However, now may not be the time to expand your “Build a Toy” workshops that are great at creating neighborhood goodwill, but cost more than you make on them.
Some non-strategic costs are things that creep into businesses over time and can be eliminated permanently. When you find non-strategic costs that you believe can be successful in the long term, see if you can find a way to make them profitable. If not, you may want to put them on the back burner until the economic climate recovers.
3. Raise prices on segments with the most impact
One way or another, every business needs to raise their prices in some way to get through inflation. As previously mentioned, raising prices on lower-margin segments has less impact on profitability and usually have a lot of value to “loyalist” customers who buy frequently. You don’t want to lose these price-conscious customers, so it’s important to raise prices on the highest-margin offerings as this will have the greatest impact on your overall profitability.
4. Leverage technology and automation
Technology has changed the way businesses perform everyday functions and can help reduce costs and make your business more efficient. Ask your CPA, business management team, or colleagues if they’re aware of tech that can improve operations, or do some research on your own.
There are options available to meet just about every business need and every budget. Start small with one or two easy-to-implement improvements, assess the impact, then tweak as needed and keep moving forward.
5. Secure working capital funding
Having enough working capital on hand is often the difference between surviving and thriving. Working capital gives you the financial flexibility to weather times of uncertainty and leverage business growth strategies and competitive opportunities. And in times of high inflation, you’ll have more financial power, whether that’s purchasing inventory and supplies in bulk to leverage discounts or negotiating better costs and terms with your suppliers.
The most important thing to remember is that as the government tries to slow down inflation, interest rates go up and the cost of borrowing increases. This means during inflationary times, short-term working capital, like a line of credit, will cost your business less than longer-term financing.
Pursuit can help
If your business doesn’t have enough working capital to take on these strategies, there are great loan options available. Pursuit offers more than 15 funding options for working capital, inventory, technology, and many more! Get in touch with us today and learn more about how we can help your business grow.
