It seems like you can’t go a day without hearing about supply-chain disruptions, inflation, or labor shortages. These three issues are having profound impacts on businesses and, in turn, their customers. We’ve been hearing from manufacturers and contractors who can’t get materials, retailers who are facing sky-high shipping rates, and small-business owners who can’t find employees. One local restaurant was serving meals on paper plates because they couldn’t hire a dishwasher.
These challenges result in high downtime, lost sales, shrinking margins, and customer dissatisfaction. Dealing with one of these problems would be hard enough, but some business owners are facing all of them simultaneously. Owners need to consider some fundamental principles and get creative with short-term (hopefully) solutions to survive.
When it comes to working capital, cash is king
This has always been a fundamental of business practices, and it’s truer now than ever. Long supply lead times and rising costs can swamp a business that is not controlling cash flow and watching inventory. Closely monitor your accounts receivable and try to keep all accounts less than 30 days outstanding. Cash needs to be available to keep your current suppliers happy by paying your bills on time and to weather rising costs and shrinking margins.
Look for inventory deals (but be cautious)
Stocking up on larger amounts of inventory may alleviate the risk of a shortage when shipments are delayed, but be careful. Larger inventories mean you’re either tying up cash or extending your line of credit. We have seen huge inventories rendered obsolete because of new technology advances, spoiled because they were stored outside, or rejected by customers who had moved on to other products.
Now is the time to start forecasting
While no one can see the future, estimating your cash flow for the next several months may allow you to anticipate problems so you can prepare in advance. If you’ve never considered forecasting because it seemed overwhelming or a waste of time in soothsaying, now may be the time to take another look. Many people use a best-case, worst-case, and most-likely model. By anticipating future problems, you can begin discussions with your lender and customers now. If forecasting seems too complicated or overwhelming, we’re here to help.
Examine your pricing and cost structure
Rising costs can severely impact a business that is not prepared to absorb shrinking margins. A 7% increase can wipe out monthly profits that a small business may need to pay debt, compensate owners, etc. Here’s an example before and after a supplier cost increase:
|Before Increase||After Increase|
|Cost of goods sold (rounded)||$210,000||$225,000|
|Gross profit margin||30%||25%|
By increasing prices by 5% (assuming no lost sales), this business could maintain its $15,000 monthly profit. Of course, an owner needs to evaluate the marketplace and customers but addressing pricing strategies early on can keep the business afloat. Grimbleby Coleman can provide tools to help you analyze your current pricing structure. We can also make recommendations or provide additional guidance.
Consider eliminating low-margin products or services
Many businesses have products or services that have very low profit margins. With rising costs and shrinking labor availability, it may be time to eliminate some offerings that you’ve been willing to carry up to this point. If a labor shortage is going to have a negative impact on sales, consider redirecting labor to high-margin areas and cutting or eliminating low-margin areas.
Be creative and flexible with your labor force
You may have heard in recent months of the “Great Resignation” that is impacting all types of businesses. Workers are voluntarily leaving their jobs due to a variety of factors (COVID illness or fear, childcare demands, early retirement, etc.). The food service industry has been hit especially hard. Many businesses have been forced to announce cutbacks in their operations. Others are operating with skeleton crews. Here are some things we’ve observed from clients with strong employee retention:
- Be creative and flexible with schedules and the work environment. Childcare issues arising from illnesses and unexpected school closures may require a lot of flexibility.
- Consider incentive plans for employees who rise to the challenge.
- Consider hiring remote workers if it fits your business. Many people are willing to work from home, making geographical boundaries disappear. To maintain company culture and teamwork, use video apps such as Zoom or Teams to maximize face time between people. Involve remote workers in company-wide activities whenever possible.
We’ve been following our own advice in this area. Over the past year and a half, we’ve hired many remote workers, several of whom are outside of California. We hold a weekly Zoom check-in for anyone who wants to attend — no agenda, just time to hang out together and avoid isolation. Ask us our perspective on best practices.
Speak regularly with your key suppliers
Know what’s going on with your suppliers. By speaking to them regularly, you may be able to anticipate windows of opportunity, shortages, or potential price increases.
Be on the lookout for other supply sources
You may have very strong supplier relationships, but reliance on one supplier for critical materials could cripple your business if the unexpected happens. Locate alternative suppliers and consider directing a small amount of your purchases to them in case you need to make a switch.
Communication is key to managing expectations with your customers, suppliers, and lenders. A regular dialogue goes a long way toward alleviating fears, uncertainties, and doubts. Let your customers know why you’re implementing changes and whether they’re permanent or temporary. Keep your suppliers up to speed on your anticipated needs in the months to come, and let your lender know of any anticipated cash needs or expected financial reporting issues.
The bottom line: get creative with your preparation
The anticipated duration of these problems is anyone’s guess. That’s why it’s so important for business owners to anticipate and prepare the best they can. You may need to consider things you’ve never done before, such as implementing a pricing strategy, creating a cash-flow forecast, or preparing an employee incentive plan.
We have experience in all of these areas, and you can count on us to help you weather this storm and create a smart plan for whatever comes next. Get in touch with us at firstname.lastname@example.org with your questions.