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Inflation remains high in some industries. Does your business management reflect this?
In order to safeguard against the impacts of inflation, you need to ensure better control over your costs to protect your company’s profit margins.
What causes inflation?
How does inflation impact businesses?
How can you protect your profit margins in an inflationary market?
What causes inflation?
In 2022, the Consumer Price Index (CPI) grew at its fastest rate in 40 years in Canada, reaching 6.8 %. Fortunately, inflation has slowed significantly since the end of 2022 but prices are still high and the CPI remains above the Bank of Canada’s target of 2%.
The price increase affects all components of the total CPI basket. It is due to significant imbalances between supply and demand for many goods and services.
Much of the inflation is attributable to disruptions in the supply chain, workforce shortage that is pushing up wages, and other factors, such as the war in Ukraine. The restaurant industry, for example, is strongly affected by this situation.
How does inflation impact businesses?
Inflation erodes profit margins by increasing the cost of purchasing inputs.
In the construction sector, for example, contractors sold houses at prices set long before the materials were purchased and now have honour their commitment, even if the project is no longer profitable.
The erosion, or even disappearance, of margins, puts the financial health of these businesses at risk.
How can you protect your profit margins in an inflationary market?
Have a clear view of your cost
Only a minority of SMEs have a good knowledge of their costs. Many set prices according to market prices, without checking whether this makes sense in their own business. At a minimum, businesses should know their contribution margin, which is total revenue minus variable costs.
You have to make sure you cover variable costs when you sell your products or services. In today’s market, many variables are changing simultaneously (wages, inputs, cost of health measures) and it is important to have a clear view of the costs.
Secure your supplies
It is important to do everything possible to secure supplies. Can you sign longer-term supply contracts to guarantee your purchases at predictable prices?
You should also cultivate your relationships with your suppliers, because in the current context of shortages, some of them may choose to stop serving you in order to prioritize more profitable clients. A good relationship can potentially avoid this type of setback.
Optimize processes
Before passing on price increases to consumers, it might be better to consider your operational performance. So far, few companies in Québec have invested in a digital transformation. Optimizing processes generally increases productivity by 15% to 25%.
You can generate more services or products with less waste using the same work force, thereby reducing your costs. You are not responsible for inflation, but you have the power to adapt by taking action on this aspect of your activities.
Rethink the business model
Sometimes this is the only option remaining. In more vulnerable industries, rethinking the approach and being open to new business opportunities in a fluctuating market can be beneficial to keep margins at an adequate level.
In order to avoid taking the wrong approach, let our experts assist you. They can provide guidance and save you time and money. Moreover, many subsidy programs are available to allow entrepreneurs to benefit from such expertise.