Inflation and Pricing Impacts
Inflation can affect every business in different ways and will depend on a variety of factors. Ways to manage inflation can vary significantly from business to business. Below is an article to help shed some light on inflation and common methods small and medium sized businesses use to manage the challenges inflation brings.
What is inflation and how is it measured?
Inflation is a term used to describe the overall increase in prices for goods and services over a given period of time. To measure inflation, the Reserve Bank of New Zealand uses the Consumer Price Index (CPI). The CPI measures the percentage change of a weighted basket of goods and services that are commonly purchased by households such as groceries, housing costs, transport costs recreational expenses, clothing and many more.
How does inflation affect your business?
Every business will experience different rates of inflation to that of the CPI and is dependent on your exposure to a varied list of goods and services. In any case, an increase in inflation will see both your material and labour costs increase. Also, it can raise the cost of borrowing, as interest rates rise to combat inflation. If left unaddressed, inflation will reduce your margins and profitability.
What are some ways you can use to mitigate the effects of inflation?
You might be thinking, if my costs increase, I’ll just raise the price and pass the increases on to my customers. While pricing is one lever a business owner can pull, it’s certainly not the only one. Pricing adjustments also come with its own risks, what if your competition apply better business practices and manage to maintain consistent prices? During times of inflation, it is essential to examine business practices to ensure margins and cashflow are preserved.
Things to consider, include but are not limited to:
• Where do your high margins lie? Can you target more of this work?
• Wages tend to be one of the largest expenses, are your employees generating a satisfactory level of revenue, or could productivity be improved?
• Another large expense is the cost of materials. Is your applied markup correct? Are all your materials purchased being on charged, or is wastage occurring? Are you considering the cost of freight in your pricing model?
• Purchasing equipment or investing in infrastructure that will add efficiency to your business over the long term,
• How do your prices stack up compared to the market? Is there any room to move?
• Negotiate supplier agreements early to lock in pricing,
• Source materials or labour elsewhere, offshoring vs outsourcing,
• Are your customer contracts equipped to deal with price fluctuations?
• Underpinning all of this is access to relevant financial information – we strongly suggest the use of cloud based accounting software to deliver timely and relevant business data
Each situation depends on your individual circumstances. If you would like more information on ways your business can manage inflation, please contact Daniel Horsham at our Wanaka office on 03 443 8771. We can help in setting up a plan and provide advice during times of uncertainty.