High inflation affects both businesses and individuals, as rising prices reduce profitability and buying power. Staff shortages, freight challenges, and bad weather add more layers to the cost-of-living crisis.

As a business owner, you need to adapt to these changing conditions to survive. Consider the following strategies to prevent inflationary pressures from causing a rise in your business costs.

Option 1: Wait until the market recovers

Maintain current prices and profit margins, even if it means generating less profit (or losing money). While this approach can help you weather the storm in the short term, it will limit your ability to invest in growth opportunities or respond to changing market conditions. Additionally, it’s not sustainable forever.

Increase prices

Raising your prices will help profit margins but can also reduce demand, especially if customers are price-sensitive or competitors offer lower prices. Carefully consider the impact of price increases on your customer base and assess whether you can still compete.

Find a new market that is less price sensitive

Target a different customer base or enter a new geographic market. This approach could reduce the impact of rising costs, but it may require additional investment in marketing or product development.

Develop new products with a better margin

Create innovative new offerings that command higher prices or generate more sales. While this approach might be challenging, it can help your business to differentiate in the market and position you for long-term success.

Option 2: Increase your cash reserve

When faced with financial pressure, you could improve cash flow and reduce costs by converting assets into cash. These strategies can potentially have long-term implications for the business, such as letting go of an asset at below-market value or no longer having a piece of equipment you need to expand. You may find cash in your business if you:

Convert unused assets to cash

Reduce any inventory, raw materials, manufacturing, and packaging supplies that aren’t currently in use. Eliminate any short-term investments and access funds in offshore accounts if needed. This will help you simultaneously generate cash and reduce carrying costs.

Option 3: Restructure

Think about the parts of your business that work and reinvent or re-structure the areas of your business that are struggling to adjust to the new normal. Take a close look at what can be salvaged and then act like a new start-up to build a new, stronger business on the foundations of the old one. What would you do differently, and how would the business look?
You may want to:

• Delete unprofitable product or service lines
• Close down parts of the business that no longer contribute
• Sell or lease assets not needed
• Change the expertise mix of your staff (possibly letting some go)
• Invest in new research and development.

If you can, establish one or more identifiable target markets and then design your business around providing an exceptional service offering in that area. Customers will still need to know what is special about your business to set you apart from your competitors, so try to differentiate with unique products and services.
If you decide to restructure, gain as much business advice you can from your advisors, existing staff, industry experts and those you trust. Validate your ideas by searching the internet, subscribe to industry news, visit business association sites and talk to suppliers to validate your ideas.

Option 4: Trade out of trouble

Shift your focus to driving sales to widen your operating budget. By generating more income, rising inflation won’t affect you as much because you’re bringing in more money overall.

Approach new customer segments

Identify untapped customer groups with unmet needs. Once identified, adapt your products or services and develop targeted marketing campaigns to reach these customers.

Diversify

Expand your product to attract new customers. This could involve adding new product lines, expanding into new markets or geographies, or developing new services.

Market to regions outside your area

Tap into new markets and reach new customers. This could involve developing targeted marketing campaigns, partnering with local businesses, or attending trade shows in these regions.

Make operational improvements

Optimise processes and reduce operating expenses wherever possible. This could involve adopting new technology, automating processes, or streamlining your supply chain.

Summary

Inflation is hard for businesses to adjust to, but there are steps you can take to adapt and thrive. No matter which combination of approaches you adopt, taking proactive steps to future-proof your business will help you weather the inflation storm and position yourself for long-term success.

Next steps

• Calculate how long you can withstand keeping things as they are. If it would mean financial hardship for your business, decide how to address it.
• Determine which strategy or combination of methods would work best for your business to return to profitability. Remember to balance effectiveness with impact on your customer and your business.
• Think about incremental changes you could make to widen your profit margin a bit so that you’re better able to absorb having to adjust during hard times. The earlier you take this step, the easier the next round of inflation will be.