In the March 2022 quarter, trimmed mean annual inflation hit 3.7%. It hasn’t been that high since March 2009. Headline inflation reached 5.1% in the first three months of 2022 and the Reserve Bank of Australia predicts it will reach 6% by the end of the year.
With inflation expected to continue to rise – both at home and abroad – this puts significant pressure on businesses as they navigate the shifting landscape. Despite the squeeze, it’s not a hopeless situation. There are steps you can take to protect your business against inflationary pressures. Here are the four actions we recommend businesses consider.
Understand your wages
Inflation is pushing the cost of living up. From petrol to groceries and everything in between, households are faced with rising bills. For businesses that employ people, there are going to be many conversations ahead as those employees ask for pay rises to meet their higher costs of living.
It’s crucial that you understand the key roles in your business and the efficiencies you can drive across your team and the business. It’s important that you avoid compensating people for their rising living costs rather than your business drivers.
Also of note is the messaging from the Reserve Bank that pay rises shouldn’t match the inflation rate. The reasoning for this is that if wages spiral upwards, the unemployment rate may increase with it. It’s a fine line to walk, balancing the needs of your employees with the needs of the business.
Review your pricing
An even finer line to walk is that of your pricing. If your price is too high, you lose volume. If your price is too low, you don’t cover the cost of your inputs.
There are some questions you need to ask to get the balance right:
- What level of price increase is the market willing to absorb?
- Can we reduce input costs through efficiencies that we can then pass on to the customer?
- Is it possible to keep prices on hold (or at a smaller increase compared to competitors) to then take a bigger market share?
So, if everyone is dealing with inflation, how much do you charge? Some businesses will put their price up too much and struggle because of it. If your business has the opportunity and can afford it, a more modest price increase may help you capture market share and get bigger volumes.
You need to be crystal clear on where you sit so you can find equilibrium. Pricing decisions can’t happen in a vacuum. They should be part of a broader set of holistic discussions about creating efficiencies across the business.
Minimise your supply chain risk
Supply chain challenges have largely contributed to the global inflation situation. The COVID-19 pandemic saw factories close and shipping containers held up in ports. Other global weather and political events have also worsened supply chain challenges.
The result? Many businesses – perhaps yours included – are struggling to get the inputs they need for their products and services. If your wages and your prices are going up but you’ve got nothing to sell, you’ll find yourself in a world of pain.
However, by taking greater control over your supply chain and implementing protective strategies, you may be able to cushion the blow of rising inflation.
How do you do this? One strategy is to obtain finance to buy in bulk to ensure you have enough inventory for a period of time. While your competitors are struggling to get resources or are buying stock at higher, inflation-driven prices, you’ll be in a good position.
This approach isn’t without risks. In difficult times, spending goes up for some industries and down for others. It’s wise to consider your supply chain strategies in the context of predicted consumer behaviour and broader industry challenges or opportunities.
Turn to a trusted advisor
You don’t need to devise your strategy on your own. At Vital Addition, we’re here to help with clear and reliable information so you can make the right decision. We can work through different scenarios and support your forecasting and budgeting process.
As your outsourced CFO, we drive greater cost efficiency by providing better and more accurate results than an in-house alternative. Contact us to discuss your business concerns and how we can develop a strategy to protect your business against inflation.