Westcourt

Structuring your business to combat inflation

In Australia inflation has effectively not been part of the family business and investing landscape for at least two decades. So dealing with rising prices and rising costs, and engaging cloud accounting software solutions to help that, in your commercial family business to make it prepared for inflation is important. 

Here are some simple measures, backed up with cloud accounting software solutions, for families who own great businesses can take to manage inflation.

1. Know your costs

Inflation is not applying evenly across the board.  In some categories, like beef, the price spike can be sitting around 60% and for other items, like the cost of poultry, has not moved at all.

Understanding the individual costs within your business and how these costs are moving is critical before you start adjusting prices. If you move on pricing before it is warranted you could find that your prices are now uncompetitive. Likewise, if you just take the “average” CPI number published by the government you could be subject to a massive cost blowout if your costs are increasing higher than the national number.

If you are doing large one-off projects the cost control is critical. We have seen the use of cloud accounting programs like WorkFlow Max or using Xero Projects a really useful too for understanding how the business is operating.

2. Keep your contracts flexible

If you have fixed price contracts look at their renewal date and how you anticipate managing these moving forward. It might be that a three year fixed price contract might need a pricing review every 12 months rather than 3 years. If you have contracts with locked in price increases of 2.75% you might need to consider the negotiations to increase the fixed increases or  link them to actual inflation numbers.

The use of invoicing and sales cloud software programs like Ignition, SimPro or Hubspot has been helpful for tendering and the use of altered sales contracts.

3. Consider alternate pricing

For some businesses with very high variable costs and low margins – fixed price contracts might simply not be an option for your business. Look at how you can structure your contracts so that you have flexibility in the ultimate final price – a cost plus contract or a fixed contract with a variable element depending on costs. Another option is to have quarterly price adjustments rather an annual adjustments.

Importantly – nobody wants to engage with a supplier who goes bankrupt. Proactively engage with your customers (who are having the same problem) and discuss how you can both structure your contracts so you can continue to service and do so with profits.

The alternate pricing strategies and discussions can often be packed up with cloud software programs like ApprovalMax, ignition or LEAP (which all link back to Xero).

4. Look at your staff

Getting great staff on board with a strong work ethic is incredibly difficult. The investment in culture and team from prior years is going to pay in in bucketloads where mature staff will not jump ship for a $5k pay rise.

And the price paid for great staff with a strong work ethic by competitors will increase and they will approach your valued team. So talk to your staff about remuneration and what they value most – the simple approach of “pay more” is often discussed and is a significant lever. And also engage with additional options for your team including flexible work arrangements, working from home, salary packaging motor vehicles, education, car parking and work related travel.

If you want to create a great culture make sure that your HR is world class. We have helped many clients with could accounting software programs like KeyPay to provide a HR backbone compliance support to retain employee contracts, appraisals, negotiated salary outcomes and payslips.

5. Get an outside view

Engage with an advisory board to look at how your business is structured and operating strategically. The presence of inflation will create uncertainty and volatility in your business and engaging with an outside advisory board will give you a different strategic perspective on how your business can best pivot to deal with that uncertainty.

The structured advisory board with outside business people from a range of backgrounds is one of the most common factor we see in successful businesses. At Westcourt the advisory board model has typically seen significant client growth among those clients who adopt this strategic focused approach to their business.

For those clients with verbose board meetings (like a non-profit group) cloud software programs like BoardPro can be helpful in managing the volume of information in a board pack.

6. Look at your cashflow

If you do have an unexpected cost blowout in your business due to inflation you might not be able to react instantly to that impact. Discussions with customers and engaging alternate suppliers takes time.

Look at your finances, cash reserves and lending facilities and manipulate your forecasts to see how the impact of different costs will alter your forward cashflow. Engage that forward cashflow back to your business working capital and see the solvency impact of that change depending on the timing of your new inflation strategies.

Typically businesses who prepare meaningful forecasts through programs like Futrli, Calxa and Fathom (rather than Excel) will be able to property understand these financial shocks and help a business prepare.

7. Diversify supply

If you have one key supplier in your business you are typically beholden to that supplier. What if the supplier unilaterally decided to raise prices by 10%? In some instances it can be wise to have a number of smaller suppliers so you can balance one against the other for a competitive tension even though “all in” might get a better short-term price reduction.

If you are looking at engaging with multiple suppliers the management and payment of suppliers is part and parcel of the process. We have helped clients with programs like DiviPay, Unleashed, HobDoc and Dext manage suppliers, invoices and payments so that you retain control on a range of your new suppliers.  

At Westcourt we understand how families in businesses operate. As business owners we have not only created our own business but helped famiy’s build great business that have lasted over generations or been sold to large ASX listed groups for significant value. And structuring the business – financially, strategically and with people in mind – to deal with volatility is a core part of what we do. So if you want to build a resilient capable business we are a natural choice – why not give us a call?

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