Most firms can do more than they realize to curb the effects of rising prices on the bottom line.
Price increases in New York City are as common as rush hour traffic and fights between Yankees and Mets fans. Still, when I realized that the cost of my morning coffee has doubled over the past year (yes, you read that right), it hurt.
It’s hard to find the silver lining in a 100% increase – especially because caffeine is, at least for this New Yorker, as essential as my train ticket. But these aren’t typical times. With 54% of American small business owners – from coffee shops to construction firms – claiming inflation as their biggest challenge, according to U.S. Chamber of Commerce polling, such painful hikes make good business sense. Raising prices on your goods or services is just one of the defenses a responsible business can take to stave off inflation’s most corrosive effects.
The Squeeze Explained
My increased coffee tab reflects continued increases during the past year in the Producer Price Index (PPI) which tracks the cost of raw materials for those providing goods and services. When the PPI rises, businesses are compelled to raise prices, which result in increases in the Consumer Price Index (CPI), the government’s benchmark for the cost of consumer items. More simply, you, the coffee shop owner, and thousands of small businesses nationwide are feeling the squeeze and taking a beating on profit margins.
Given these market realities, I respect that coffee-shop owner for putting a critical best practice of business leadership – minding the gap between costs and revenue – into action. And you can too. Let’s look at a hypothetical coffee shop to examine the tools your business – no matter what goods or services you provide – can use to battle inflation for your small business operation.
Bean Counting in Inflationary Times
The price of coffee beans has risen, as have the cost of paper products, utilities, and labor. The owner, faced with such rising operational costs, can do one or more of the following:
- Raise prices as needed. Especially on small-ticket items and everyday indulgences like a morning latte, consumers may accept incremental hikes – providing increases are in line with the competition.
- Reduce overhead. Are coffee-bean suppliers open to negotiation? Can the shop close an hour earlier without a big dent in sales? These are potentially great tactics – if they don’t compromise product or service quality.
- Boost cashflow. Could the shop revisit payment terms with its suppliers? Even a change from Net 30 to Net 45 can ease the squeeze.
- Try something new: Might branded coffee mugs bring in a higher per-sale profit margin than daily coffee sales? Or a “bring your own cup” promotion could cut down paper costs, too. Loyalty programs can also promote sales while cutting costs.
- Secure small business financing: Whether the shop seeks a new investor or gets a loan from a bank or online lender, it may benefit from additional capital.
When you monitor your margins, you’re acknowledging just how much current economic events can help or hurt the business you’ve worked so hard to build.
Maintain a Positive Outlook
Focus on what you’re good at while developing the willingness and ability to pivot quickly. If you’re up for trying new strategies and tactics while keeping an open mind, you can better weather the effects of a slowed economy.
Many of our customers and partners have asked how we feel this inflationary trend will pan out. Though no one can say for sure, our take is that we’ll remain in a challenging economy throughout 2023. With that in mind, keep monitoring your profit margins and liquidity and be sure you have the cash flow to weather the storm.
The good news? The Great Recession seemed like doomsday, but it’s now simply an unpleasant memory of what remains a cyclical economy. America’s small businesses are rightfully called the true backbone of our economy, and they’re here to stay.
In the meantime, I’ll be enjoying my morning coffee – and hope you do, too.
Since 2008, Fora Financial has distributed $3 billion to 35,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.