Brexit, covid, the energy crisis and now the conflict in Ukraine; all are combining to create a difficult economic picture for small businesses as operating costs increase sharply. After an already punishing couple of years, it’s once again a case of survival for many business owners.
Whilst the external factors are outside your business’s control, what options do you have to ensure your business remains viable as your profits are squeezed?
1. Make sure you have a firm grasp on your financial situation. First things first, you need to have a clear understanding of what these rising operating costs are, and how they’re impacting your business. Once you know the full situation, you can plan your strategy to address the operational areas that need to be reviewed, updated, trimmed back, halted or removed. Working with an accountant is worth strong consideration, as they can give you tailored advice, ranging from sources of funding, to setting your prices to reviewing your budgets. Cloud accounting is also beneficial, as you can access up-to-date reports, helping you make informed decisions quickly. (For more information, see our guide on when you need to hire an accountant.
2. Review your pricing. Adding your fixed costs (such as rent, insurance, salary, equipment) to your variable costs (such as raw materials, electricity, packaging, etc) will give you your breakeven figure when setting your prices at the very beginning. Increasing the price your customers pay for your products/services is always risky; however, as we’ve seen, unprecedented events can cause variable costs to soar and this is when it’s worth re-assessing your pricing as part of your business’s response. Don’t be too afraid to increase your prices if you need to – most customers expect that the cost of their products won’t remain stagnant forever.
You might experience some customer churn if your competitors don’t follow suit, but if you handle the communication of it quickly and authentically with your customers, you might be surprised at how many are willing to stick by you when they understand the situation. Ways you can encourage a smooth implementation is to contact them directly, let them know in advance, explain the reasoning and make yourself available for any questions. It’s risky, but sometimes necessary to avoid operating at a loss. (For more information, see our guide on setting your prices.)
3. Analyse your business cost effectiveness. There’s only a limited amount of money you have to spend on your business, so it’s important you make your money work harder, especially during uncertain times. Making your business cost-effective is ensuring you are getting the maximum out of your available funds. It’s ensuring that you’re spending your budget on the right things with the aim to get the best value for money that you can. Regularly reviewing and analysing your costs as objectively as possible is good business practice. A great way to regularly monitor cost-effectiveness, is to download a budget tracker app. Again, this is something an accountant can assist you with if it isn’t your area of expertise.
4. Improve your financial skills. Investing in your understanding of the financial side of your business will help you make quicker, more confident decisions in response to any operational problems (and opportunities!) that come your way. Whether it’s learning by osmosis from your accountant, embracing cloud accounting software or investing in online finance courses, you’ll be able to budget and understand and analyse financial statements better.
5. Funding. Deciding how to fund a business can be challenging, in part because of the variety of funding structures available. Each type of funding has its own risks and rewards for the business and its founders. Looking for extra funding could be an option.
Banks are the obvious place to start – could you discuss a small business loan with them or an overdraft facility in order to help navigate some temporary financial difficulties? Bank of England interest rates are still fairly low, so the cost of borrowing is still also comparatively low, so it might be worth considering whether you allow your business to take on a little debt in order to stay afloat. This is very common in larger businesses in order to deal with peaks and troughs in the cashflow. However, you need to be comfortable that you continue to have a viable business and means of servicing any debt you take on.
6. Conduct a supply chain review. Supply chain management is a crucial process because an optimised supply chain results in lower costs and a faster production cycle. Dissect your supply chain fo ensure it’s operating efficiently and you’re getting the best value for money at each stage. Research the best value for money, without compromising on quality. This could involve trawling for better deals on your stock, to bulk buying packaging to reduce the unit cost, or reviewing your delivery provider to get a better deal.
7. Get rid of any unused services. Are you paying monthly annually for software services that you’re not really using? Consider downgrading to the free version or cancel altogether if you don’t see the value. Keep a log of your subscriptions and review it regularly. If you discover a service you like, but don’t require all the features, shop around, as there are a lot of affordable options out there. Set diary reminders to review your list of services – it’s a great way to run a lean ship.
8. Can you buy in bulk/pay annually to save in the long term? Many suppliers and software providers offer better deals when you commit to purchasing more items in one go/pay for an annual subscription. Review your budget and work out if you can afford a bigger one-off payment that equates to paying less each month.
9. Operate more efficiently with automation technology. Automation technology is transforming how businesses operate, as it allows you to do more with less, helping you scale in ways that were never before possible. The right software will speed up and streamline operational elements of your business, releasing time for you to re-channel into profit-focused activities such as new business development. Accounting, project management, email marketing, social media posting, appointment booking, payment processing, database management – there is no shortage of cloud-based solutions and apps out there that can help. Most solutions offer free trials, which are worth taking advantage of to ensure they’re the right fit for you.
If you’re not particularly tech-savvy, is there an employee who could step up into a more operational role, who’s particularly good with technology and can conduct research and trials for you, and be responsible for implementing it into the business?
10. Outsource for extra efficiency. Delegating specific tasks to subject matter experts outside of your business can be an effective long term investment, particularly until you’re in a position to consider hiring in-house expertise. As a small business owner, you’re understandably spinning a number of plates － why not outsource your marketing activity for a period of time, and review the results from an ROI perspective?