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If you’re one of the many small business owners across WA facing rising costs, uncertain economic conditions and the impact of inflation, you’re not alone. While you can’t control these factors, you can take action to help put your business in the strongest position possible.
We asked one of our experienced business advisers, Brian Childs, for some of his top tips for small business owners dealing with inflation, rising costs and financial pressures. Here are some of the insights Brian shared.
Be curious about rising costs
According to Brian, it’s important to look into costs thoroughly, as many small business owners will accept yet another increased cost for their business without investigating further.
"The inflationary ‘tide’ is coming in across the economy and everyone is impacted. Your suppliers, freighting suppliers, packaging suppliers and so on, are all likely to be experiencing inflation-driven cost increases. It is likely these suppliers will look to pass these cost increases along to the next business down the purchasing chain," said Brian.
"Business owners can be absorbing a ‘death by a thousand cuts’ and not realise until the accumulated harm is evident," he says. "They might see their costs rising item by item without checking the logic and scale behind the cost increase with their supplier."
"I am seeing owners absorbing price rises of 10 per cent to 15 per cent without any comment provided by their suppliers. Regional and remote businesses can be particularly impacted with rising logistics and freighting costs."
Conduct a financial health check
Brian recommends setting aside time to conduct an internal financial health check and cost review across your business. To do this, he recommends you:
- Print your last annual profit and lost statement from your accounting system and carefully examine the cost of goods sold (if applicable) and your overheads for the year.
- Calculate each cost as a percentage of your turnover and use those figures to look for the largest costs.
- Typically, the largest three categories will be the cost of goods sold, wages and salaries (including superannuation, workers compensation, staff amenities and other costs) and the costs of occupancy, which includes your rent plus outgoings and property maintenance costs.
Brian notes that if you’re confident that the figures look right, you can then look further into each category.
"Once you have identified and quantified your costs, you can examine them and explore cost reduction."
Review your staffing costs
First, you can review your pay structure and confirm you’re paying the correct award and superannuation for your employees.
"Your automated payroll systems will calculate annual leave and personal leave entitlements, but there’s no substitute for confirming the correct award is being applied – this is the highest cost for many businesses.
Once you have checked the cost structure for your staff, you can review your team’s productivity.
"Check if your staff are fully productive for the hours of attendance and if extra training is required to remove any productivity blocks. You can also look at whether your staff members have a current duty statement and are fully informed of required duties and performance metrics, with these metrics measured for feedback."
Review your occupancy costs
Brian recommends you review and check your lease as a starting point for examining your occupancy costs.
"Has your landlord or managing agent increased the rent each year in accordance with the formula in your lease? If the rent increase is CPI plus a percentage, check if your lease specifies which CPI (local or national) to use."
You might also choose to have the property surveyed or do it yourself and check the leased area as described in the written lease.
"You could find you are paying for more square metres than has been surveyed. If so, you could then renegotiate for both a reduced rent and recovery of overpaid rent since the beginning of the lease. Ask your accountant for help with these calculations if in doubt."
Brian also recommends you compare all occupancy costs including rent, outgoings and tenancy maintenance such as cleaning and repairs per square metre, against the typical costs for your industry/business type.
"If you find your occupancy costs are excessive compared to industry norms, you might then consider relocation or renegotiate with your landlord when your lease or an option for renewal is due."
Communicate with your suppliers
As you check your annual cost of goods, you should also monitor suppliers for 'cost creep'. According to Brian, signs of cost creep can include:
- unannounced increased charges, accompanied by an invoice which must be paid in full
- announced increased charges that appear excessive
- changes to terms and conditions that have not been announced such as reduced payment times, removal or reduction of rebates, removal or reductions of discounts for volume purchases.
If you have noticed cost creep, get in touch with your supplier.
"You could negotiate for a reduction, ask for a delay before the cost increase or diminished term is imposed, for example three months. You could also ask the supplier what can be done to minimise or avoid the cost increase, such as a volume discount. If the supplier refuses to offer concessions, you might want to ask for extended payment terms without penalty."
Another option is to research alternative suppliers and check for any 'honeymoon' offers that you can present to your current supplier.
"Assume that you are a valued customer and the supplier wishes to keep you as a loyal customer."
Enlist professional advice
Your accountant can help with much more than your BAS and tax returns, including providing financial modelling and expertise you could benefit from.
"Once you have completed your financial health check, make an appointment to meet with your accountant. Ask them to remodel your profit and loss into a projection with your findings applied and calculate your break-even point."
"You can then work out the margin you need to generate a net profit that will recover your return on investment (ROI), principal of loans and other recoveries unique to your business."
Once you’ve examined your costs carefully, taken action to reduce your costs where possible and created a projection for your business’ financial future, it could be time to review your pricing structure .
More information
If you’d like to discuss an issue facing your business, book an appointment with our free business advisory service.
When you’re examining your finances, you could benefit from using our range of tools for your business, including cashflow forecasts and cost of goods sold calculator.
If you’re overwhelmed by financial pressures you’re facing in your business, you might benefit from help for businesses in financial distress.
