Beating inflation is likely top-of-mind for your small business. With inflation on the rise and interest rates on savings at all-time lows, keeping business savings afloat is becoming more difficult with each passing week. Congested supply chains, high fuel and commodity prices, and chronic skills shortages cutting into margins and eating into the value of business savings.
So how can a small business weather the storm and beat inflation in 2022? We have a few strategies that can help.
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The current state of play
The Reserve Bank of Australia, using its levers on the fiscal system attempts to control inflation to a manageable 2-3% p.a. This is the optimal range of inflation, as it has the least impact on business and consumer purchasing decisions. However, if inflation outpaces wage growth it means the purchasing power of our money decreases. At current, inflation is at 5.1%, while wage growth is at 2.3% – which means inflation is outstripping wage growth and is a decrease in absolute terms.
This means you will have to raise your prices – which can negatively affect demand.
Diversify your supply chain
The adage “don’t put all your eggs in one basket” is a well-worn one but true for business trying to fight the current of inflation. Supply chain issues during the pandemic are still not over – so diversifying your supply chain of raw materials, products, etc. so you aren’t dependent on a single source – which has a risk of drying up or increasing prices and impacting your entire operation – can help to mitigate some of the inflationary pressure you may be facing.
Strengthen your pricing power
Even if you’re in a highly competitive industry, you can still lean into your unique selling proposition and leverage that into providing more value to justify price increases – or to increase your prices in a way that improves the bottom line. You could shorten contract lengths or add variable pricing mechanisms, invest in the customer experience, or offer discounts on ongoing contracts or bundles of products to make your offer more enticing than the competition.
Can you vertically integrate?
Vertical integration is the process of owning the various stages of its production process instead of outsourcing it elsewhere. By owning the process, you aren’t paying extra overheads or fees to external companies thereby reducing your exposure to risk and inflationary pressure. In the early 1980s, Commodore Business Machines vertically integrated its microprocessor fabricator into the company (MOS Technologies) which meant it could offer its home computers for much cheaper than its competitors despite high inflation.
Embrace the WFH revolution
One of the few upsides of the pandemic was that businesses could become agile overnight – do you really need to pay costly rent on a premises when business functions could be done from home? Not all of your business can be run from home – especially warehousing or manufacturing – but management and administration can be done remotely; and your business can pocket the savings.
Switch to high-interest savings accounts
If your business savings account is only paying out in line with the current RBA cash rate, you may want to consider using high-interest savings accounts that accrue extra interest when your business makes deposits. Generating greater growth on your principal can help set aside operating capital when you need it in an emergency.
Retain and upskill staff
Labour shortages means that the labour market is tilted in favour toward employees more so than employers – but even if you’ve run the numbers and can’t offer huge bonuses or wage increases, you can offer non-monetary compensation such as novated leases (which also increases their take home pay and gives them a new car to drive), professional development, or training courses. Retaining the best staff that are trained – and can train others – in streamlined and optimised processes can be a boon to any business, whether being threatened by inflation or not.
Lines of credit and flexible funding
Although any entity should save as much as possible, a business may be vulnerable to inflationary
pressure if they are unable to access lines of credit and unsecured business funding. With interest rates being as low as they have been in Australian financial history, securing a low rate to finance operations and long-term assets in the form of long-term loans may be suitable for your company to beat inflation. If you can earn more interest on your capital savings, you may be able to outpace the interest on your liabilities – leaving your business much better off.
No matter what kind of business you run, you can beat inflation using a few tried and true methods – remember to ask a financial adviser for professional advice, as the tips in here are general in nature.
