From rising labor and energy costs, to supply chain disruptions across industries, small and medium-sized business (SMB) owners are dealing with unprecedented challenges on a number of fronts. Although these financial trends are adversely impacting many small businesses, there is hope. Understanding the sources of the following issues, as well as potential solutions, can help you address challenges in ways that best leverage your company’s resources.
1. Supply chain issues
Whether you run an Etsy shop or a large-scale food supply company, you are likely dealing with supply chain issues. The current supply chain challenges started with the spread of COVID-19 worldwide in early 2020, which led to facility and port closures and manufacturing employees staying home.
With few workers to produce goods or load vessels, shipping slowed significantly. Once the pandemic abated, people began shopping again, driving demand for many products much faster than anticipated. However, people were still getting sick and missing work at manufacturers, ports, trucking companies and railroad lines, leading to product and supply shortages and port jams. All of this caused issues up and down the supply chain.
For small businesses, one of the most adverse impacts of supply chain issues is the resulting cash flow issue. Most small businesses must either prepay for goods or use credit lines.
When goods are hung up on ships, in warehouses or elsewhere for weeks or months longer than intended, businesses must max out these credit lines, causing significant cash availability issues for other aspects of the business. Larger businesses with extensive credit resources can decouple supply chain issues from cash flow issues but smaller businesses often cannot.
To help improve these direct supply issues, diversify your supplier base for both domestic and international suppliers. Consider broadening your product range to reduce the impact of being out of stock. Add complementary services to create packages at minimal additional cost to you.
You may also need to pivot your business model and diversify in general, perhaps by expanding from supplying only kitchen countertops and cabinets to more comprehensive kitchen installation materials. Remember to adjust prices to cover increased importation or supply chain costs wherever possible.
To address any cash flow issues you have identified, work closely with your operational team and financial staff to keep costs as low as possible and schedule payments strategically. For example, you might pursue 90-day instead of 30-day terms, even if only for certain products, and obtain an increase in credit lines where possible. Although you can’t get around paying initially for goods before they depart port, you may be able to submit the remainder of the payment when you receive them, instead of when they land in the port.
2. Rising energy costs
According to the National Federation of Independent Business (NFIB), “Energy costs are one of the top three business expenses in 35 percent of small businesses.” One of the largest energy expenses is gas for vehicle fleets. So, if you operate a fleet or employ workers who use their own cars for their job (which could include anyone from delivery drivers, to insurance agents) and your firm reimburses those expenses, you are dealing with unprecedented energy-related cost increases. Other major energy expenses include heating, cooling and equipment operation (such as diesel or propane).
According to Biz New Orleans, rising energy costs are adversely impacting profitability. However, all firms can lower the price of fuel by joining warehouse clubs or other entities that offer steep gas discounts.
To reduce the impact of rising gas costs on fleets:
- Improve route efficiency and driving style to reduce fuel usage.
- Improve shipping or delivery processes to reduce or eliminate unnecessary trips.
- If your business is big enough, purchase and store large fuel quantities.
- If feasible, consider hybrid, electric or other fuel-source vehicles when replenishing your fleet.
According to Constellation Energy, a few tactics to reduce heating and cooling expenses include:
- Installing ceiling fans throughout the workplace. These circulate air and reduce the energy load on your HVAC.
- Using programmable thermostats. You can set these at much lower or higher temperatures (depending on the season) during non-work hours.
- Regularly maintaining units, and replacing them when needed. This includes changing air filters and sealing ducts.
- Having your local utility conduct an energy audit, and follow the recommendations. These audits are often free.
3. Rising inflation and interest rates
Rising inflation, interest rates and other macroeconomic factors were triggered by pandemic shutdowns, supply chain issues, increasing demand and the war in Ukraine. According to the Minneapolis Fed, before the pandemic recovery, the U.S. had been in a low inflation environment (below 3 percent) since 2012 but is on trend to be the highest since 1990. Although older businesses experienced such an environment in the 1990s or even 1980s, newer firms have not. While the news you see in the financial press may feel doom and gloom, by focusing on SMB best practices, you can prepare for and overcome these changes.
Consider these actions to counteract rising inflation and interest rates:
- If you’re thinking of getting a business loan, get one now to lock in rates at their current level. For example, according to Freddie Mac, the average residential mortgage rates increased by nearly 2 percentage points between early January 2022 and late May 2022, from 3.22 percent to 5.1 percent.
- Whenever reasonable, raise prices to pass price increases from your suppliers onto your customers. Absorbing rising costs will squeeze your margins and potentially lead to financial problems.
- Consider folding a working capital loan into an equipment or other term loan in order to lock in rates and avoid the variation you typically see in lines of credit.
- Pursue extended terms with suppliers, such as net 30, 45 or 60 days. These carry zero interest charges for timely payments.
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4. Pricing adjustments
Business owners often focus solely on sales volume dollars as the determinant of business success. Although this is a natural reaction as sales drive business growth, only paying attention to sales can lead to margin deterioration, cash flow issues and losses.
In a competitive or inflationary market, business owners often feel pressured to reduce prices to maintain sales volume. In such cases, many owners want to provide discounts or cut prices. However, even on a temporary basis, this is rarely the answer. Few companies can generate extremely high (Walmart-like) volumes to justify low pricing.
Pricing is critically important. You need to price your product and services high enough to maintain the operating and net profit margins your firm needs to achieve strategic goals. In addition, the higher your profit margin, the more revenue flows through to your bottom line. Conversely, the lower your profit margin, the more revenue you need to generate to experience the same impact on the bottom line as certain cost reductions. For example, if you have a 10 percent profit level, a $10,000 increase in sales will produce the same impact as a $1,000 cost reduction on the bottom line. However, if your profit margin drops to 4 percent, you now need to generate $25,000 in revenue to match a $1,000 cost reduction.
To weather a changing market and strengthen your operations, try two things:
- Strip out or reduce costs wherever you can. Reduce what you pay for goods and services by buying in bulk, negotiating lower prices or switching suppliers. Automate operational steps where possible.
- Add “value” to your product or service by offering warranties or guarantees, high-level customer service, and customer checkups and follow-ups. Ensure you clearly communicate that value to customers so they fully understand your firm provides this as part of the price paid.
These four issues can place strains on your business profitability and cash flow, but the key is to think creatively about solutions and remain positive. All challenges can be dealt with and even lead to a stronger, more sustainable firm.
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