3 Strategies to Protect Your Profits Against Inflation
Posted: Tue Dec 10, 2024 7:00 am
Rising energy costs, talent shortages, geopolitical conflicts and supply chain disruptions have driven up companies’ operating costs. And while headline inflation appears to be slowing, prices for many products and services continue to rise at a faster pace. As a result, operating costs are likely to remain volatile for some time to come.
However, with the right strategies, entrepreneurs can not only protect their profits but also foster sustainable business growth. Indeed, despite cost headwinds, today’s economic environment is ripe with opportunities for business owners willing to rise to the challenge.
The key to survival and prosperity lies in striking the right balance between addressing costs and investing in growth.
Investing in software and new technologies has the potential to grow your revenue faster than your costs. And while some technologies remain expensive, many are accessible to SMEs.
Here are three fundamental strategies you can implement to achieve this delicate balance.
1. Ensure solid financial management
To protect your profits, you need to know your turnover figures. Two types of analysis in particular will allow you to better understand the financial health of your company.
Costing – Conducting a costing exercise will allow you to assign accurate costs to each of your lines of business, products, services, projects and accounts. This will allow you to see which activities are making money and which are generating losses. This will allow you to focus on the profitable activities and re-evaluate the rest. This information will help you determine whether you should accept or decline a contract, raise or lower your prices, drop customers or discontinue a product or service. Finally, conducting a break-even analysis – determining the level of sales needed to cover all your costs – will further improve your financial decision-making.
Financial Forecasting – A major new contract may be great at first, but it can quickly become a drain if your free cash flow isn’t strong enough to support it. To properly analyze how your business decisions will impact your future costs and profits, you should prepare a cash flow forecast for at least six months, but ideally twelve months, and prepare a three-year forecast of your income statement , balance sheet and cash flow statement. These tools will allow you to perform extremely useful what-if analyses. For example, what would happen if you sold only half of what you projected? What would the impact be on your costs, financial performance and cash flow? How much can you afford to spend on research and development for new products or services that may not yet be profitable?
Protect Your Profits Against Inflation: Financial Management Analysis
2. Embrace technology for greater efficiency
Investing in software and new technologies has the potential to grow your revenue faster than your costs. Whether it’s process automation in offices or physical automation in factories, this strategy can increase output per person while improving quality and consistency. And while some technologies remain expensive, many are accessible to SMBs.
Let’s think about processes: a number of them are easy self employed database to automate, such as marketing-related tasks. As many as 80% of top-performing companies use marketing automation tools for lead generation, e-commerce, customer service and engagement, and event management.
Here are some other simple processes to automate that might be a great place to start:
Billing
Customer Relationship Management
Inventory management
Automatic purchases
Processing orders and invoices
Reporting Production
When it comes to physical automation, don’t think it’s just for big companies with deep pockets. Smaller businesses are benefiting from machines that allow them to better perform tasks like box erecting, packaging, palletizing, material handling, welding and assembly. And the options are more affordable than they used to be.
While SMEs sometimes offer fewer benefits and money, they can allow talented people to feel seen and heard in ways that larger companies don't.
Exploring decarbonization
Decarbonizing your business can be a profitable avenue: companies that adopt new technologies are 4.4 times more likely to grow, and those that also manage to reduce their carbon footprint are 7.7 times more likely to grow. A good place to start is by investing in energy efficiency .
More generally, going green is important as major industry players prepare to meet new reporting requirements on ESG (environmental, social and governance) factors. As a result, more and more companies are communicating their requirements for ESG performance to their suppliers. Adopting better environmental practices will therefore allow your company to access larger markets.
Reviewing your construction, procurement and distribution decisions can also be very effective in reducing your costs. In addition, a real commitment to ESG factors is an effective way to differentiate yourself from competitors when it comes to attracting and retaining qualified employees.
3. Build a strong corporate culture
Talent is expensive, especially as salaries have increased due to the labor shortage . A strong, positive company culture will support your HR strategies without you necessarily having to offer more money or incur the high cost of employee turnover.
Unfortunately, there’s no denying that many business owners overlook their company culture. However, it’s a powerful and valuable currency when it comes to attracting and retaining talent. And when it comes to culture, small businesses can have an advantage: many people choose to work for a small or medium-sized business over a large corporation. The reason is simple. While small businesses may offer fewer benefits and less money, they can allow talented people to feel seen and heard in a way that larger companies don’t. Make sure your staff feels like they’re making a valuable contribution to building something valuable. Give your staff a compelling mission and inspiring values, and ensure they have a close relationship with you, your management team, and your customers.
However, with the right strategies, entrepreneurs can not only protect their profits but also foster sustainable business growth. Indeed, despite cost headwinds, today’s economic environment is ripe with opportunities for business owners willing to rise to the challenge.
The key to survival and prosperity lies in striking the right balance between addressing costs and investing in growth.
Investing in software and new technologies has the potential to grow your revenue faster than your costs. And while some technologies remain expensive, many are accessible to SMEs.
Here are three fundamental strategies you can implement to achieve this delicate balance.
1. Ensure solid financial management
To protect your profits, you need to know your turnover figures. Two types of analysis in particular will allow you to better understand the financial health of your company.
Costing – Conducting a costing exercise will allow you to assign accurate costs to each of your lines of business, products, services, projects and accounts. This will allow you to see which activities are making money and which are generating losses. This will allow you to focus on the profitable activities and re-evaluate the rest. This information will help you determine whether you should accept or decline a contract, raise or lower your prices, drop customers or discontinue a product or service. Finally, conducting a break-even analysis – determining the level of sales needed to cover all your costs – will further improve your financial decision-making.
Financial Forecasting – A major new contract may be great at first, but it can quickly become a drain if your free cash flow isn’t strong enough to support it. To properly analyze how your business decisions will impact your future costs and profits, you should prepare a cash flow forecast for at least six months, but ideally twelve months, and prepare a three-year forecast of your income statement , balance sheet and cash flow statement. These tools will allow you to perform extremely useful what-if analyses. For example, what would happen if you sold only half of what you projected? What would the impact be on your costs, financial performance and cash flow? How much can you afford to spend on research and development for new products or services that may not yet be profitable?
Protect Your Profits Against Inflation: Financial Management Analysis
2. Embrace technology for greater efficiency
Investing in software and new technologies has the potential to grow your revenue faster than your costs. Whether it’s process automation in offices or physical automation in factories, this strategy can increase output per person while improving quality and consistency. And while some technologies remain expensive, many are accessible to SMBs.
Let’s think about processes: a number of them are easy self employed database to automate, such as marketing-related tasks. As many as 80% of top-performing companies use marketing automation tools for lead generation, e-commerce, customer service and engagement, and event management.
Here are some other simple processes to automate that might be a great place to start:
Billing
Customer Relationship Management
Inventory management
Automatic purchases
Processing orders and invoices
Reporting Production
When it comes to physical automation, don’t think it’s just for big companies with deep pockets. Smaller businesses are benefiting from machines that allow them to better perform tasks like box erecting, packaging, palletizing, material handling, welding and assembly. And the options are more affordable than they used to be.
While SMEs sometimes offer fewer benefits and money, they can allow talented people to feel seen and heard in ways that larger companies don't.
Exploring decarbonization
Decarbonizing your business can be a profitable avenue: companies that adopt new technologies are 4.4 times more likely to grow, and those that also manage to reduce their carbon footprint are 7.7 times more likely to grow. A good place to start is by investing in energy efficiency .
More generally, going green is important as major industry players prepare to meet new reporting requirements on ESG (environmental, social and governance) factors. As a result, more and more companies are communicating their requirements for ESG performance to their suppliers. Adopting better environmental practices will therefore allow your company to access larger markets.
Reviewing your construction, procurement and distribution decisions can also be very effective in reducing your costs. In addition, a real commitment to ESG factors is an effective way to differentiate yourself from competitors when it comes to attracting and retaining qualified employees.
3. Build a strong corporate culture
Talent is expensive, especially as salaries have increased due to the labor shortage . A strong, positive company culture will support your HR strategies without you necessarily having to offer more money or incur the high cost of employee turnover.
Unfortunately, there’s no denying that many business owners overlook their company culture. However, it’s a powerful and valuable currency when it comes to attracting and retaining talent. And when it comes to culture, small businesses can have an advantage: many people choose to work for a small or medium-sized business over a large corporation. The reason is simple. While small businesses may offer fewer benefits and less money, they can allow talented people to feel seen and heard in a way that larger companies don’t. Make sure your staff feels like they’re making a valuable contribution to building something valuable. Give your staff a compelling mission and inspiring values, and ensure they have a close relationship with you, your management team, and your customers.