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How inflation could affect your businesses’ profit margins

Kirsty McGregor Jun 21, 2023

Are you tired? The past few years have seemed to be a slog for many business owners, not least because many are actually busier than they’ve ever been! But whether your business has struggled over the past months, or has boomed, all entrepreneurs are saying it’s been a tough ride. 

The mainstream business press seems to only reflect the experiences of larger companies, so may not truly match what you’re finding. We know there is always a time lag between how larger corporate businesses trade and then months later, it trickles down the supply chain. So you can often find your patterns are opposite to the major news stories. 

This can make planning for the future really tricky.  

But as Kitty Ussher, Chief Economist at the Institute of Directors confirmed from their most recent business confidence index, "Confidence improved in the first few months of the year as business leaders began to believe that the outlook for the UK economy, although difficult, was not as bad as they had previously been led to believe."  

Smaller businesses should begin to feel similar upturn soon, as long as they have plans in place to ensure their current business remains resilient through these last tough months.

 

This article highlights some business strategies you can focus on, to ensure that you can control the controllable elements in your company.

Inflation coming off the boil?

The eye-watering rises of Producers’ Price Inflation (PPI), or supply side inflation, felt mainly by manufacturers has started to drop. This means that prices are still rising, but not as quickly as they were before.  

The impact of food prices is still having a strong effect and therefore if you work in hospitality or food retail, you may start to see a slowing down of the increases which are being passed on. 

Pro tip: If inflation is still affecting your business, ensure you have a flexible line of credit so that if you see discounted rates, you can take advantage and buy stock at better prices. 

Margins are super important

Margins differ from industry to industry, but they all show how well your business is doing, relatively speaking. 

Staying financially healthy is as important now as it’s ever been.  Identifying risks to your business early could be the difference between a good year and bad year.

However, before you can make any decisions, you need to have up to date financial data to see how your business is being impacted.  Understanding the reality of your gross profit margin level, and also after taking account of the remaining fixed overheads such as business premises rent or staff wages, puts you in a stronger position to plan. 

Pro tip: Speak to your accountant for assistance in quickly obtaining and understanding the figures you need.

Handling suppliers’ price negotiations

Suppliers want to deal with good businesses. Those companies who will trade well with them and not cause them any problems.  

So they’ll carry out a risk assessment at the beginning of your relationship, and, if they’re savvy, continue to check that whilst you’re trading with them.  

To do this most larger companies will credit check their potential customers before they decide what prices to charge you - how much do they want your business? And before they determine how much credit to lend you - effectively free funding for your company.  

The stronger your business credit score, the more leverage you may have in price negotiations. You can find out how many searches have been carried out on your business by logging into your free Credit Profile
 

Steps you can take to give yourself the advantage with suppliers:

  1. Ensure you have the strongest credit score possible
  2. Communicate how you will be a good customer and how you could provide more than just trade, but also case studies, testimonials, opening doors to other contacts
  3. If you want to focus on a better price rather than a longer credit period, show you have strong finances by offering a deposit or better credit terms than their norm
  4. Offer to move all your business to them, rather than using a range of different suppliers
  5. Don’t accept their first offer and continue to negotiate

 

Taking the tough next step - handling your own price increases with customers

You may realise that you too have to increase your prices. This can be an uncomfortable conversation to have with customers you value. But for those unprofitable customers, it can be the most sensible thing you do. 

Communicating well with your customers will help reduce the chance of the good ones leaving you, so contact your customers directly and give them plenty of notice about any price rises which will affect them. 

Explain the situation and why you are finding it necessary to make this decision and suggest alternatives, if possible. Perhaps you have a lower specification product which may suit them or you could decide to extend credit terms for those valued customers who may be going through a temporarily less profitable period. 

Take control over which customers you trade with and be informed about their own cashflow situation, before it’s too late.  

You can spot which customers are having problems by using Capitalise for Business to monitor key customers and watch out for any legal notices or any other impacts on their company credit score
 

Take action to control the controllables

As Zig Ziglar said, “You don't have to be great to start, but you have to start to be great”. 
Putting these basic steps in place will allow you to feel stronger in your decision making. 

Ensuring that you maximise your own profitability, your working capital from suppliers and protect the credit you offer your customers, means you can remain resilient and grow your company, despite a tough market around you. 

To access your free credit profile and to start monitoring your financial health and that of your customers, sign up to Capitalise for Business

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