How To Lead Your Business Through Inflation

Working with growing businesses as their finance team we’ve been leading conversations on how to protect their business and enable growth in these difficult times of increased costs and inflation.

How do you manage the effect of inflation on your business?

The key is to be agile. Small businesses have this opportunity – no red tape and long lines of decision-makers. Decide today, implement tomorrow – or even sooner!

There are practical financial management tools you can use to support best decision-making.

Six Strategies to Help You Manage Your Business In Times of Inflation

1. Scenario-based decision making

To help you react quickly and appropriately, use your financial forecasts to run ‘what if’ scenarios so that you understand the financial robustness of your business in several different scenarios.

This will also help to take the emotion out of some potentially difficult decisions because you will have thought through what you will do in advance.

The ‘if X happens what effect will it have on Y’.

The Smart Team often uses a dashboard with our clients to get a quick view on financial KPIs so we can monitor performance each month. By using financial scenario planning, we can take this understanding a step further by looking at the impact of changing factors, and as Cash is King, we are focused on the impacts on your business’s cash flow.

Inflation can be volatile and have deep and lasting effect. Prices go up and down changing very quickly. Businesses need to be able to react appropriately and sometimes quickly. The Smart Team will help you to create various scenarios with financial forecasts, the details will depend on the business and sector.

The types of financial scenarios to play out could include what would happen if:

• Wages went up by 10% to keep talented staff.
• Your supply chain was slowed down and took an extra month before critical parts were delivered
• Your main supplier went out of business
• Your suppliers’ prices increased month on month
• You lose one of your key “super” clients/customers

Look at how each scenario may affect your cash flow. Think about what evasive measures you can take in each scenario.

Ultimately, using these scenarios will mean you can make business decisions with greater confidence. You will be able to react more quickly and be more agile, ahead of competitors. There are also more preventative actions you can take. Please read on.

2. Focus on what you can control

Setting KPIs will help you measure and review your journey to successful steady growth.

What indicators can your business watch which will help you predict what is happening in your business? If you have thought about this in advance you can make decisions quicker, because you have already thought through the best course of action to take.

“Preparation, I have often said, is rightly two-thirds of any venture.”

This comes back to understanding your cash flow and what affects it.

It helps if the whole organisation focused on cash management. Give cash the attention it deserves.

Focus on how the following affect your cash flow:

• Debtor days – how long do your clients take to pay you? Are they passing on their financial struggle to you? Look at trend lines, scenarios here again – what happens if debtors take longer to pay you? See the problem before it exists and make decisions such as stronger debt collection or payment terms?
• Creditors – how many days do you take to pay your creditors?
• Investments – get your timing right so you’re not placing cash pressure on your business unnecessarily.
• Plan for strategic projects you have coming up.

Every business is different but start with this. It comes back to focus on cash and cash flow through your business and understanding the drivers behind your cash flow.

But it’s not always about the financial numbers, although cash forecasts are very important. You should also look at forecasts of your stock levels. Maybe there are particular items you need for your business that are critical to completing orders. You could consider stockpiling some of those which will be affected by inflation. Get ahead before suppliers put their prices up or fulfilment of orders becomes difficult if parts cannot be sourced in time.

However, you need to be careful not to tie up too much of your cash in stocks. Again, financial forecasts come into play here looking at your order history and most profitable and popular product or service lines.

What about your pricing? Can you pass on some of the cost increases to your customers? Are they price-sensitive? What’s your competition doing? A SWOT analysis may help. Maybe your cashflow projections will allow you to hold your prices?

It depends on the business and its financial KPIs, competitor analysis, and forecast models.

3. Don’t weaken your supply chain

Think about how you can diversify your supply chain. You may have a really lean and cost-effective supply chain. The challenge of running a tight ship could put you at risk if a supplier goes under or increases their prices to an eye-watering level out of the blue. See where the financial scenario comes in?

We suggest strengthening your relationships with a few providers and maybe keep higher stock levels for any items which may be super sensitive to rising prices. This avoids a break in the chain or a pause in your supply!

Would you like help to be more agile and make an informed decision to protect your business from inflation?

Diversify your suppliers without compromising on quality. Cheapest is not always the most cost-effective way of doing things. Take the time to negotiate the best quality, after all it will come back to reflect on you!

It may cost a little more in the short term, but long-term sustainability is more important to the survival of your business. It gives your business flexibility and choice. There’s the A word again, agile!

4. Wise loan decisions

Increased interest rates is one of the most visible effects of inflation seen by small business owners. The cost of borrowing increases, and there is increased scrutiny from lenders.

Options for small businesses can be limited. They should consider alternative lending opportunities and maybe lock in lower rates by converting variable loans to fixed rates. If they can raise cash now, in most cases I would recommend doing so.

As a Virtual FD, I recommend reviewing your business borrowing. Seek professional advice for the best options such as the option of converting a variable loan repayment to a fixed repayment.

The Smart Finance Team works with business loan and factoring experts and can signpost you to partners we recommend.

5. Watch your spend

We’ve come through the challenges of Covid and now businesses are hit by inflation! Businesses often look to cut costs by reducing overheads. However, it’s important to spend in the right areas.

Don’t cut bluntly and lose sight of the future.

Here’s our cost-saving tactics and tips:

• Continue spending in the right areas.
• Address any operational inefficiencies.
• What can you automate to reduce labour costs? Not just a cost-saving tactic, it will free up staff to focus on strategic value add activities which will also benefit the business by increasing retention.
• Cut cost in areas of the business that aren’t performing as well as you want them to.
• Don’t make untargeted costs reduction.
• Don’t cut talent out of your business. If you have strong talent, perhaps niche, keep it!
• Marketing can be the first area to be cut but be careful! It’s not really the best thing to do in all cases. You may want to trim but don’t trim too far!
• Don’t cut costs on things that will generate positive cash flows.

You don’t want to end up in a race to the bottom!

6. Power in Your People

People are always at the heart of successful businesses, especially service-based ones. Look after your team and protect the talent that you need in order to grow your business. Of course, we are going to point out that we offer access to financial expertise and leadership, which is often difficult for small businesses to access.

Would you like help to be more agile and make an informed decision to protect your business from inflation?

Take the first step and book a call with Tracy, a no-obligation chat, to see how The Smart Team can help you be more agile and protect your business from these inflationary times.