Managing your Business in an Inflationary Environment

Covid-19, supply chain issues, staffing shortages among others, are driving unpredictable price increases and general uncertainty for many businesses, so how do you best manage and navigate these times?

What’s driving the changes to the cost of goods and services?

  • Prices of many commodities and raw materials have risen dramatically over the past two years. For example, aluminium saw a nine-year high, some building materials have seen the largest price hikes in 15 years, and steel prices are around three times higher than a year ago.
  • International supply chains are unstable – different regions and governments handle lockdowns, citizen movement and business interruptions in different ways.
  • Demand is uncertain as consumers change up their buying patterns. During 2020 they bought to have stock at home, in 2021 they bought to stay entertained while in extended lockdowns, so far in 2022 they are not buying since if they are at home, it’s because they are unwell or isolating with unwell close contacts/family members.
  • A lot of manufacturers reduced their capacity at the onset of the Covid-19 pandemic and when demand increased more quickly than anticipated, many were not in a position to increase capacity to meet it.
  • Add to this, the semiconductor chip market is facing global shortages. Why does this matter? Because it affects the manufacturing capacity of everything from power supplies to new cars.

All of these factors, and more, are resulting in higher costs and limited supplies of production materials, which are expensive to transport.

What does the future hold?

The outlook is…unpredictable. We may return to pre-pandemic pricing however, in some instances, there have been structural changes which will not be undone into the future.

As business owners/management, what can we do?

Option 1 – Wait and See

This can be a cautious/sensible approach however then there is the risk that our competitors will better handle the response to increased costs.

Option 2 – Tackle it head on

Addressing some key questions within our business and then formulating a strategy is another approach to these uncertain times.

Questions will vary by business or industry, but some foundational questions to ask are:

What exactly is going on in our business?

  • Are input prices going up and by how much?
  • Are the price increases temporary or permanent?
  • Are the price increases erratic or predictable?
  • Are we approaching or have we achieved peak pricing?

What’s the potential impact of different scenarios?

We really need to understand:

  • What happens to our product profitability as input and sales prices change?
  • How is customer demand impacted by increased prices or price elasticity?
  • At what point will customers look for substitute products?

What else can we do?

  • Can we improve our procurement practises – competitive bidding, negotiating terms, engaging a different supplier, hedging, entering longer-term contracts?
  • Can we hold our suppliers accountable in order to ensure that price increases are, in fact, occurring due to market forces?
  • Can we update our incentive systems for sales and procurement teams – if currently based on lagging costs versus actual achievement we may not be encouraging the best commercial decisions.
  • Can we revisit price indexing versus price renegotiation?
  • Can we ensure that any price increases are appropriately communicated to customers – done the right way this can place our business above the competition?

And finally, is our financial reporting accurate and frequent enough?

To get through this, management will need to make ongoing decisions, not a one-off. So we all need to consider:

  • The time lag from taking action and achieving results.
  • The analysis of historical data and the understanding of forward-forecasted gross margins – on a monthly or quarterly basis – which requires accurate and transparent cost accounting.
  • Building a dedicated team to oversee planning and strategy – organisations are establishing an ‘inflation team’ for this exact purpose – often calling upon external, expert advice and assistance.

Can we use these uncertain things as an opportunity?

Shifts in business environments present challenges and opportunities, you just need to know where to look for them. Since everyone, including your competitors, are navigating a similar situation you may be able to gain additional business from existing and/or new customers who are not satisfied with other suppliers due to pricing and supply issues.

Revising your procurement practises during uncertain times may uncover substantial and long-term benefits for your business.

While business environments remain uncertain, owners and managers should ‘expect the unexpected’ yet make decisions based on solid strategies, a clear understanding of cost drivers and market insights.

Beyond Advisors offers professional advice for businesses of all shapes and sizes. For any help or assistance on navigating uncertain times and price increases you can get in touch with our helpful team and open your doors to success.

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