We’ve all felt the impact of inflation directly at the petrol station, in the supermarket and when heating our homes. As inflation disperses across the whole economy, we’re starting to feel the impact of inflation on how our businesses and organisations operate.
Although inflation has arrived suddenly upon us, it is not likely to disappear just as quickly. The Bank of England is forecasting it will be two to three years before we return to inflation levels of 2% – and some might consider this optimistic.
Inflation can quickly erode margins and create cash flow issues if no action is taken. Here are 6 steps that you can take to manage the impact of inflation upon your organisation:
- Identify the areas of cost where inflation is going to most impact you – and model it forward
Increases in costs are more pronounced in some areas than others. You may be protected in some areas by having fixed price contracts in place. The starting point for managing inflation is to know how it will impact your future business.
It is worth creating a financial model that can factor in different levels of inflation for different lengths of time. In this way, you can run some ‘what-if’ scenarios and assess how resilient your business model is. Will you have enough cash reserves in each scenario? What actions can you take now to mitigate future risks? Does the changing landscape mean that (some of) your business model becomes unsustainable? Can you still say confidently that you are a ‘going concern’?
- Control your costs and manage your supply chain risks.
Monitoring costs is important at the best of times, but it is critical as prices start to rise. Are there items of spend you could do without or reduce? Can you negotiate with suppliers to secure prices, by leveraging your buying power?
If you are dependent on a single supplier, or have long lead-times on supplies, or rely on materials that are difficult or expensive to store, then you may be facing vulnerabilities in your supply chain during this time of inflation. It is worth exploring ways to manage and mitigate these risks such as by putting in place alternative suppliers, identifying domestic alternatives to foreign suppliers (and vice versa), and stockpiling critical supplies which have low holding costs.
- Support your staff
Pay awards to staff is one thing within the control of your organisation. Workers are seeing increases in their work-related costs – particularly commuting costs – as well as more generally. You will need to decide to what level you are able to support your staff to cope with rising costs. On the one side, it needs to be affordable to your business. On the other side, you risk losing good staff – and incurring additional recruitment costs instead.
- Safeguard your income
If you have long-term grant agreements or contracts in place, are you able to negotiate an inflationary increase? Funders should be aware that if grants or contracts remain at standstill prices, then they are in effect giving you less over time.
Passing on increases in running costs to customers through your sales prices may become necessary. Can you increase prices in small increments? In this way you can keep pace with inflation without creating a significant price hike that could cause customers to go elsewhere. Alternatively, you might have sufficient cash reserves to weather a short period of inflation – could you maintain prices at current levels to ensure you remain affordable to those who rely on your services (and win over new customers from competitors)?
- Take advantage of the time value of money (if you can)
In an inflationary environment, a pound today is worth more than a pound tomorrow. So it can make sense to spend your money today, rather than tomorrow – cash flow permitting, of course!
Is there opportunity to purchase items of stock at today’s prices and avoid paying at a higher price in the future? Or to invest in equipment or other areas of the business that can create future efficiencies?
- Ensure your business model is sustainable
Purpose-led businesses undertake activity to meet social needs and often activity has very little margin in it, or indeed is loss-making and reliant on subsidy to deliver. Inflation could quickly make an activity financially unsustainable to continue to deliver in its current form.
Controlling costs and improving efficiency is one tactic and ensuring income levels continue to cover costs through price increases is another. Cash reserves might help you to weather a short period of inflation, but this won’t be sustainable over the longer term. Some tough decisions may be needed to discontinue activities that are no longer viable, or to reshape or rescope them to make them viable. Ultimately every charity and social enterprise needs to be financially sustainable in order to deliver its mission.