Stay-at-home orders during the pandemic removed workers from production. But those absences in the spring of 2020 were nothing compared with the subsequent Covid fears, need to care for children, accelerated retirements, the Great Resignation, and a lack of immigration. Labor shortages caused supply chain issues that now make everyday goods harder to find, which increases demand and prices.
There are many other inflationary factors as well: low unemployment, high wages, rising energy costs, rising fuel costs (the result of sanctions against Russia for the war in Ukraine), interest rate hikes, and escalating housing costs. And for everyday Americans and businesses, the latest inflationary blow: Gasoline prices increased 48% in the 12 months ended this past March.
Rising fuel costs increase the cost of both manufacturing and receiving the merchandise many franchise businesses sell. It also affects the cost of shipping and delivering merchandise to customers, particularly as online sales grow and customers want everything delivered!
Unless you increase prices to offset rising costs, a smaller percentage of each dollar falls to the bottom line. How do rising fuel prices affect your business? What’s your plan for minimizing the impact? Every business owner must think this through.
Responding to inflation
How do businesses respond to inflation? Raising prices is a common approach and one that is almost always necessary in inflationary times. But there are additional actions to consider. Here are some common business strategies for combating inflation.
- Sell more – a smaller profit percentage on higher revenues can still yield higher profit dollars overall.
- Watch your numbers closely – understand where the money goes and use breakeven analysis to track how your cost structure is changing.
- Cut unnecessary costs – but don’t compromise the customer experience.
- Raise prices – nobody wants to do it, but perhaps you must.
- Improve efficiency to offset cost increases – reduce wasted labor and materials and eliminate unnecessary processes.
- Revisit salesmanship skills and training – focus on activities that lift average ticket.
- Stay focused – know your “why” and use cascading SMART goals to keep your team on track.
- Delegate to make your team more valuable – you can’t do it all yourself.
- Buy better – take full advantage of preferred suppliers with negotiated discounts.
- Invest in inventory – if cash flow permits, bulk up on fast-turning inventory in advance of price hikes.
- Shift the sales mix – identify the products and services that carry a higher margin and focus purchasing, sales, and marketing efforts to sell more of them.
- Shrinkflation – change the packaging so price changes aren’t so obvious (fewer chips in the bag).
- Make less profit – it’s what happens if you don’t get in front of changes.
Anticipate and prepare
Inflation is a part of our expected economic cycles. To successfully navigate your pathway to profit during inflationary times, you must be on the lookout for early signs of changes and confront them.
Good financial habits such as monthly review routines to check in on SMART goals, financial skill-building for managers and team leaders, and continual cultivation of vendor and lender relationships should already be in place. If not, now is the time. When change is inevitable, follow these tips:
- Accept the change and find your comeback.
- If growth is your comeback, build scale in your enterprise.
- Bigger can be better, but don’t sacrifice efficiency or customer service just for the sake of volume.
- Invest in your team; build skills and keep learning.
- Be flexible.
- Embrace technology.
- Be a fixer, not a blamer or a victim.
- Have SMART goals and plans aimed at your business priorities.
- Watch the numbers and learn from the data.
As has been the trend in business for decades – and still is true today – you must do more to do well. Your challenge is to grow sales, improve productivity, and control costs without sacrificing customer service, convenience, and connections. Not an easy task, but a necessary endeavor that will require combining action with intention.
Barbara Nuss is president and founder of Profit Soup, a financial education organization specializing in providing services to franchisors and franchisees to enable them to trust their numbers, focus on priorities, make better decisions, and earn more profit. She can be reached at barbara.nuss@profitsoup.com or 206-282-3888.