Running a business can be stressful, there’s no question about that.
In the lead up to EOFY, we held tax planning sessions, new year goal discussions, and had a general catch up with most of our business owner clients. Apart from these standard conversation topics, there was one particular stress that we heard over and over again – the cost of living.
How does cost of living affect my business?
The increasing cost of living affects not only our home lives, but businesses too.
In a nutshell, this is because in business we buy things too. Increasing cost pressures of running a business is affecting alot of businesses.
As a consumer, we might not like it when businesses put up their prices – but as a business, it might just be something you need to do in order to protect your profit.
And it’s no surprise business owners are a little stressed – it’s not only food in supermarkets and energy prices that we hear on the evening news. It’s also pretty much every other cost that goes in to running a business that is going up.
Just to name a few, some things that are going up are:
- fuel costs
- interest rate rises
- stock
- freight
- rent
- wages
- software
What happens if I don’t increase my prices?
The inflation rate for the year ending March was 5.1%. A lot of costs are going up at rates that far exceed this, but for the purpose of illustration – I’d like to show you what happens if your pricing to customers doesn’t increase in line with your costs.
| If your net profit is: | 30% | 20% | 10% | 5% |
| Sales | $1 mil | $1 mil | $1 mil | $1 mil |
| Expenses | $700k | $800k | $900k | $950k |
| Your net profit is: | $300k | $200k | $100k | $50k |
| Your costs increase by: | $35.7k | $40.8k | $45.9k | $48.45k |
| Your NEW net profit is: | $264.3k | $159.2k | $54.1k | $1.55k |
| Your profit has DECREASED by: | -12% | -20% | -46% | -97% |
As you’ll see the lower that your net profit percentage (percentage of your sales that is profit) the bigger an issue inflation becomes.
If your net profit is 10% now, it’s highly likely that your net profit will almost halve in the next year without increasing your prices. If your net profit is currently below 10% it’s highly likely next year will be a loss.
What should I do?
If you’d like to see your profit margins remain, there are a few steps you could take.
- Firstly – review your product/service mix.
Are there areas of your business that aren’t profitable and require attention?
Are there areas of your business that need some tough decisions? - Raise prices.
If your prices aren’t going up inline with your costs, your profit will suffer. - Be smart about discounting.
Every dollar of discount you allow is a dollar straight off your profit.
Only offer discounts if you must, and only in situations where it’s going to lead to increased profits for your business in the future.
Rather than discounting, think of ways where you can add more value for your customers in a cost effective way. - Review your suppliers and services.
Could you be getting better pricing for similar quality of products and services? - Eliminate waste.
Are you over ordering?
Do you have zombie subscriptions or other products/services that aren’t being used? - Go hard early on debt collection.
If your profit margin is 10%, a $5k unpaid invoice will take $50k in new sales purely to break even on the bad debt.
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