You don’t need us to tell you that practically every cost your business incurs is going up. And while households adjust to the soaring energy prices, we ask the question; how will your business cope?
With energy costs at record highs, it’s time to consider the robustness of your business. The cost for everything from electricity and fuel-to raw materials like food or paper products can impact the bottom line in many ways.
There are a lot of money saving tips out there at the moment for uk households, but these don’t always apply to businesses. So, what can businesses do?
Take control and plan ahead
Firstly, it’s important that you know what your costs currently are and what they may potentially become. Most suppliers will have contacted customers to let them know that prices are increasing. Make sure that you’ve looked at anything you’ve been sent and make a note of it. It’s tempting to put your head in the sand. No-one wants to read huge bills – but be brave and make a list of the increases and then you can plan your next steps.
Next, make sure you understand the relationship between profit and cash within your business. Your initial reaction might be to just increase your prices by the same, or more as your new costs. This solves the profit margin problem, but does it have an impact on cash and customer retention? To get a feeling of how cash and profit interact in a business, try our calculator tool – It can be interesting to see how just increasing prices isn’t necessarily the answer. As long as you’re making a profit, then the cash lever can be pulled to make things more comfortable.
Fix Your Energy Costs
With rising energy prices it’s a good time to review your energy supplier. But bear in mind that with more and more energy companies going bust, and energy price caps so high, there may still be limited choices.
Many small businesses find themselves on default energy contracts, which can be rolled over at the end of the term at a higher price. However, there are options available for small businesses who are looking to renew their energy contracts. By shopping around and comparing prices, you can often find deals that offer more competitive rates. You should also consider switching to a different type of energy plan, such as a fixed-rate plan, and avoiding standard variable tariffs which may offer more stability in terms of price. An energy broker is also a great way of securing a good deal. Paying by direct debit is a great way to reduce the bill to a minimum, but you may prefer to pay monthly to have more control of your cash flow.
Increase your prices
Many companies are already passing on the increases in bills to their customers by raising their prices. This maintains your profit margins but carries a risk if your goods or services become unaffordable. As disposable income decreases,
many luxury items and services such as designer sunglasses or massages maybe the first thing for consumers to cut, so bear in mind the type of product or service you offer and what trends you can see amongst consumers during recessions. The last thing you want to do is price your business out of the market.
Another option (if you can react quickly enough) is to recuperate the price increases through your stock. If you have a lot of stock, especially if it is held for long periods of time, you could potentially raise your prices immediately and recuperate some of your losses.
If you’re a manufacturer who works with purchase orders this can be more of a challenge, as you may incur higher prices through your supply chain whilst adhering to the original purchase order- this needs bearing in mind.
It’s also worth noting that if you do increase your prices, your trade customers might ask for extended payment terms, and so you need to consider whether you can afford to offer these.
Change suppliers
Once you’ve reviewed your energy suppliers, look at the remainder of your supplier base as you could make significant savings by switching. However, tread carefully, although you may gain a cheaper quote, new suppliers may not offer the same terms as existing suppliers. You might even need to pay for orders in advance, which has cashflow implications.
Supplier relationships take time to forge and there are hidden costs of time and communication when onboarding a new supplier.
It may be better to negotiate new terms with your current suppliers. Just as your customers may ask you for extended payment terms perhaps you can ask the same of your suppliers. If you have a good relationship with them, an honest conversation is the best place to start with this – they can always say no but if approached in a respectful way, given the challenges all businesses are facing they are likely to be amenable if they can be.
Review your current cost base
Do you have costs that you have forgotten about? – this happens more often than you might think! Consider the many software subscriptions that you never use. Are you still paying a direct debit that should have been cancelled months ago? Can the team forego their fancy coffee machine for a bit? Do they need to make quite so many business trips or can work be undertaken over zoom? Think about your business and energy efficiency. Are you switching off lights and reducing your energy consumption as much as possible? Just as you would in your own personal life, with a little imagination, businesses can often tighten their belts while maintaining performance and staff morale
Be prepared
Creating an integrated financial forecast can be one of the most significant things you can do for your business, whatever the economic climate. The best financial forecasts have a profit and loss, a balance sheet and a cashflow – these three things combined give you a full picture of what might happen across all areas of your business. Having this information to refer to can help you make business decisions with ease – and save those sleepless nights.
Right now, there’s no avoiding that these are challenging times for businesses. But the businesses that survive and thrive during difficult times are the ones that tackle the challenges head on. Having a thorough knowledge of your business and how the finances work within it is more important than ever. It doesn’t need to be overwhelming. Take small steps each day. But whatever you do during these difficult times, don’t avoid taking control of your finances.