We’re in the midst of a cost-of-living crisis, with rapidly rising prices affecting both consumers and businesses alike.
The ability of a company to prepare for and adapt to the effects of inflation can be a huge advantage. It’s by making smart financial planning decisions that you can combat price increases and survive inflationary trends.
Across the Board Price Increases
The UK inflation rate averaged 2.55% percent between 1989 and 2022. But recently, with prices increasing markedly, it hit a 40-year high of 9.1% for the 12 months to May 2022. The Bank of England has warned that it anticipates that inflation will reach 11% this year.
And it seems that nothing is immune from price increases. Rising energy and food prices have caused a knock-on effect, which has impacted all aspects of a business. This has meant rising office rents and mortgage interest rates, increased staff hiring costs and salaries, and higher costs for insurance, business services, equipment and business travel. If you’re a distributor, then you will be further affected, having seen massive hikes in shipping costs over the past few years. And it’s not only essential costs that have been affected. The prices for typical employee rewards and entertaining have risen too.
Mounting cost pressures damage business confidence. To counteract rising costs and protect their margins, one of the first responses a business will make is to raise its own prices. In this way though, the business passes the costs onto its buyers. But the cycle of rising costs continues and risks the economy suffering a 1970s-style inflation spiral.
How Price Increases Affect Your Business
Price increases have a direct impact on your bottom line. If you must spend more to run your company effectively, then your profit will be dented.
While inflation affects everyone, some companies feel the impacts more than others. If your business operates in non-essential goods or services, for example, then you will be harder hit with consumers having less disposable income to spend. Disadvantaged by the cost-of-living crisis, consumers are prioritising the basics ahead of any luxuries.
Dealing with Inflation and Price Increases
Facing a wave of rising costs, the threat of a reduction in profit is high. Your investors, shareholders and fellow board members will not want to see that, so what can you do?
There are several strategies to counter price increases. You can do one or all of the following:
- Increase sales – to boost sales, analyse your range of products or services and cut your offerings down to those with the best margins and the highest demand. This preserves and maximises your profit.
- Increase your prices – this is an obvious approach and in fact one in four SMEs have already raised their prices.
- Cut costs – make informed decisions about cutting expenditure by identifying what is vital and what you can cut without affecting your profits.
- Build emergency funds – take steps to begin building an emergency reserve that will protect your business in case the economy suffers a more serious recession or depression in the future.
The Benefits of Financial Planning in Tackling Inflation
Inflation can be unpredictable and you need agility in your business to combat it. If your business plans can be quickly adapted to changes in inflation, then despite uncertainty and rising costs, you will have the flexibility to respond to the economic situation.
Using financial planning tools, you can devise a range of cost-saving and profit-boosting strategies that will serve your business well and help protect it from the worst effects of inflation.
You should plan for a number of different situations, so that you are prepared with strategic and tactical responses that can be implemented when or if certain circumstances arise.
For example, you could run conditional scenarios based on what happens if you need to raise salaries. Or you can model how your revenue will be impacted if one of your big clients goes out of business. And using various scenario planning parameters, you can forecast how incremental price increases of the goods or raw materials you buy will affect your sales.
The outputs can be used to inform your plans about how best to respond. For example, you can forecast how much you might need to save on operating expenses to achieve certain profit levels, or what headcounts would be required to support specific sales targets.
By modelling how your cash flow, revenue, profits and other KPIs might be affected, you can devise both responses and more proactive measures that will lower your exposure to any high-risk threats.
NetSuite Planning and Forecasting
With its powerful calculation engine, NetSuite’s built-in planning and forecasting tool delivers sophisticated modelling functionality. It is flexible and customisable, providing you with the business intelligence tools to build accurate financial plans to help you weather inflationary trends and outmanoeuvre business uncertainty. For more information, contact us today.