John Cradden looks at practical steps businesses can take to protect themselves from the effects of inflation.
The mood among Irish SMEs seems upbeat about the prospects for 2023 despite economic headwinds rising inflation and prices, according to several surveys.
For example, one by accountancy body ACCA Ireland recently revealed that 84% of small firms were as confident or more confident about the future than they were a year ago.
“While it’s expected that firms will raise prices during inflation, the key is to not to follow what others are doing, but to grow and protect your profits”
However, it’s clear that the effects of spiralling inflation are starting to take hold. The same survey showed that rising inflation and ECB interest rates were having a detrimental impact on nearly 70% of the businesses who responded.
So what can SMEs do to beat or at least counter the worst effects of inflation?
Bolster your cash reserves
It might seem counterintuitive to hold a decent amount of cash during times of high inflation, as rising prices will invariable lessen your buying power and fritter away at its value.
However, cash reserves can serve as a buffer because costs can still rise faster than you can raise prices.
You could also consider investing some of your cash into riskier but higher performing assets such as stocks, commodities and property, but tread carefully.
Keep an eye on your spending
Inflation makes it harder to stay profitable, so keep an eye on your spending, particularly since you will want to have more cash reserves at the moment as a buffer.
If you’re thinking about investing in expansion or anything intended to give your business an edge, it must make sense and have a decent change of a high return on investment.
Review pricing with an eye to profits
Recent surveys have shown that the number of Irish SMEs charging higher prices for their goods and services rose sharply in the second and third quarters of 2022.
While it’s expected that firms will raise prices during inflation, the key is to not to follow what others are doing, but to grow and protect your profits.
Taking stock of your pricing structure and knowing the finer detail behind your profit margins will help you understand how inflation will affect your ability to break even or hit certain profit targets.
Evaluate your supply chain
In terms of rising prices, you can also save costs by pricing around other suppliers to diversify your supply chain if needed, and also negotiate lower prices with current suppliers.
You can also spend time optimising your supply chain by working with the best and most reliable suppliers, even if that means paying a bit more.
Hire and retain
Some 80% of smaller firms are spending more on hiring than they did before the pandemic, but inflation is adding to wage pressures to the point where salary increases represented the single biggest concern for bosses, according to a survey by Ibec and advisory firm BDO.
So with recruitment and retention a big challenge, investing in good employee incentive and wellbeing programmes could help you attract top talent while mitigating the financial impact of inflation.
Conduct an energy audit
Energy is almost always one of the first costs to rise during an inflationary period and, as we’re finding now, the highest to climb. You can reduce your burden by performing an energy audit.
For example, installing insulation and performing maintenance on your heating and cooling systems are generally affordable and can have a lasting impact on energy costs.
Small firms are often good at being agile and flexible in response to big changes in their wider business environments. Among those external changes is rising inflation.
When the price of something rises, such as raw materials, a service or a piece of equipment, you will need to be flexible enough to adapt to the change while maintaining your core objectives.
Manage debt collection
Ensure that your debt collection is efficient and take steps to minimise any long-standing debt. Don’t let clients manage their cash-flow challenges at your expense.
You may also be paying higher prices, but if you can do more with less, and cut down on the wastage, you may be able to offset them – and lower your environmental impact.
Investing in technology can be tricky in terms of figuring out what solution would work for you, Grant Thornton International recommends looking at developments in automation, machine learning and robotics as a way to improve productivity by lowering output costs and allowing your business to use human capital more effectively.