Your Business and Higher Inflation

May 11, 2022

By Atul Oka, Senior Director of Strategy and Business Development, DUKE Heights BIA

Many businesses still not completely recovered from the impact of the pandemic now must face another challenge. Rising inflation and the linked rise in interest rates will see an increase in input costs and the cost of servicing debt for most businesses. This, accompanied by the potential slowdown in consumer demand will lead to financial stress for businesses in Canada for the next few years.

Being well prepared, however, can smoothen out the impact of these headwinds. Every business is different, but here are a few ideas that you may be able to apply in your business to help you better mitigate the challenges ahead.

1. Prioritise which products and services you push

Don’t focus on products that have a “long shelf life” even though some of these may have very good margins. These slow-moving products will tie up your capital for longer periods thus limiting your financial liquidity.

Also, try and focus on fast-moving high-margin products where demand remains stable irrespective of small changes in price. This will allow you to pass on some of the price increases in your input costs to your customers without drastically affecting your margins or volumes.

2. Spend wisely

All businesses need to spend money to make money, but during tough times it is essential that a differentiation be made between strategic vs non-strategic spending.

A simple rule of thumb to help identify if a cost is strategic is to make sure the cost checks one of the following:

  • Is the cost essential to maintaining or growing the business?
  • Is the cost going to result in a short- or medium-term cost saving for the business?
  • Is the cost a legal or compliance cost?
  • Will the cost result in a positive net ROI for the business?

If that new Lamborghini for your delivery driver does not tick any of the boxes above, it may be time to rethink the expense for the next year or two.

3. Build a financial buffer

If you are a business that carries debt, it may be time to find ways to reduce costs and repay as much debt as possible before interest rates rise too far. Streamline your processes and eliminate wasted steps, costs, and shrinkage. Try and accumulate these savings over time so you have a war chest ready for emergencies.

4. Reposition your brand

Increase the perceived value of your product or service so customers are less hesitant to pay a little more. Some costs cannot be absorbed by the business and need to be passed down to the customer. This is especially challenging when your brand or product is positioned as a discount or bargain brand or product. Price increases in this sensitive segment can and will lead to the loss of certain customers.

Repositioning your brand, however, may allow you to increase prices without adverse reactions from potential clients. Increasing the perceived value of the product by improving the quality of packaging, adding warranties or guarantees, or creating bundles or packages will allow you to attract customers that are looking for value and are willing to pay a little bit more than absolute rock bottom prices for what they want at little or no additional cost to the business.

The future is always hard to read but as Benjamin Franklin said, “By failing to prepare, you are preparing to fail”. The preparations you make today may help save your business tomorrow.