Certainly as consumers we have all seen increasing fuel, energy, and food prices during the last year. Each of us have felt the pressure at the gas pump, with our utility bills and when buying food. Food and energy costs are considered to be several of the most volatile components of inflation and because of their volatility are not considered when measuring “core inflation.” According to the Federal Reserve Board, as of late May, core inflation is fluctuating around 2.3%, up from a 2003 low of less than 1%. The experts disagree about the potential for moderation of the core inflation rate, but don’t disagree about its current impact on the economy and business.
Small business owners should concern themselves with such high level economic issues because they have historically been the hardest hit during significant inflationary times.
To date during the current inflationary period, the very large retailers like Wal-Mart, Costco, Krogers and Target have resisted passing on their increased costs for merchandise. It has seemed rather like a game of chicken. Costco recently announced it wanted to be the last large retailer to begin passing increased costs to its customers. The ultra large retailer has the financial ability to weather a shrinking gross margin. Unfortunately, this is not true for most small retailers. It is for this reason that small business owners and especially small retailers must be proactive in protecting their businesses. There are a number of things a small business owner should be considering in our current inflationary time.
Get lean and mean. The saying that the fittest survive certainly applies to our current time. Take a good hard look at all of your costs and take steps to reduce all unnecessary costs that eat at your profits.
The biggest area to look at is the cost of labor. If sales are down and your labor overhead is the same this year as it was last year, take an especially hard look at your labor costs and determine if they can either be trimmed or reduced. Look at overtime costs. Can changes in scheduling reduce them? Perhaps actually increasing over all staff by adding lower cost part-time employees can reduce overtime and the overall cost of labor. The bottom line is labor costs are the largest category of costs a small business can control, therefore should be the first costs a business owner should look at.
Hours of operation is another area which can be controlled. If you are a retailer, look at customer traffic during the early and late hours of operation. It may be prudent to consider trimming the hours your business stays open if there are signs that reducing them some will not reduce overall sales revenues. Obviously this won’t work in a mall or other retail center when a retailer agrees to keep doors open when the mall is open.
Renegotiate your rent. If your business is way off and you are in an area of the country that is experiencing tough times, go to your landlord and try to negotiate a reduction in rent while the downturn lasts. A smart landlord would rather have a tenet paying some rent rather than a vacancy that produces no income and extra costs.
Look at your expenses using a highest to lowest percentage approach, but don’t overlook some other obvious ways to conserve costs. If sales are way down, do you really need the same number of phone lines? You can always increase the number of lines you have as business rebounds. Do you have delivery vehicles? If so, can routes be consolidated, thus reducing both the number of vehicles necessary to operate as well as the fuel, labor and insurance necessary to run them.
At the same time you review and trim expenses, consider your inventory and costs of goods sold. Is there equipment that is no longer needed which could be sold, thus increasing cash flow? Is there excess inventory that needs to be sold at a discount, also improving cash flow and inventory performance?
Don’t forget to very carefully look at your accounts receivable collections. Now is the time to reevaluate credit limits for customers who may be feeling financial pressures. Keep the collection pressure up and don’t let a customer get very far behind without taking significant measures to collect. Be wary of new customers who suddenly come to you to buy from you when they have been resistant to buy from you before. It could be that they were recently placed on COD with another vendor. These type of customers represent big risks during tough economic times. There are a number of experts predicting large number of retail failures right after the Christmas season. Some large retailers are not immune, so look at all of your customers. Recent failures such as Linens and Things and CompUSA are a fraction of the examples of companies that have either gone out of business or are on the “watch list.” Most importantly, keep concentration of sales to any given customer as low as possible, given their credit risk.
Finally look at your product pricing. Get creative. It is probably true that not all the goods and services you offer are under the same price pressure on the customer end. Increase prices on those products or services that are not under as much price pressure as others. Try to pass on increases in your cost as soon as possible after you have received them. If you have a published price that can’t easily be changed, consider passing on increased transportation costs as an additional cost of the sale. Many companies are successfully passing on increased fuel costs in the form of a fuel surcharge. Think outside the box on the issue of pricing. You don’t have to make the same margin on every item or service you sell.
Finally, consider owner’s compensation. Can you afford to pay yourself less some time until this period of financial uncertainty is over.
Remember the fundamental rule about business survival which is if your company goes out of business, both your employees and customers loose. Do what is best for your company and you will be doing everything you can to protect your employees and your future.
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