More than two years on from the start of the Covid-19 pandemic, businesses are facing a new challenge. Inflation is on the rise across Europe, along with increases to the price of fuel and raw materials. For companies, that could mean navigating an increasing cost of doing business in order to maintain a healthy bottom line.

Here, we break down some of the ways business owners can help to keep their balance sheet in order.

Faced with large cost increases, it can be tempting to move quickly to slash expenses across your business. However, this may not be the best approach. Businesses that make the deepest cuts in tough times can struggle to bounce back, so aim to reduce costs in a way that doesn’t harm the organisation or potential for future growth.¹

Think strategically about the best approach for your business and set priorities accordingly.¹ For example, developing a new product could be an activity to postpone until things improve, or it might be an important step towards long-term revenue increases. Consultants at PwC recommend trimming costs from essential business activities and maintaining spend on activities that differentiate you from your competitors.¹

Immediate cost-saving measures are important, so don’t overlook simple steps such as reducing wastage or looking for cheaper deals on business essentials. However, faced with a cost crisis, McKinsey recommends planning activities for the medium and long term, as well as short-term activities that can be carried out within a month or two.²

Medium-term activities – those to be implemented within six to 12 months – might include upskilling staff in certain areas, boosting efficiency or finding new suppliers. And changes that will take two or three years to fully execute are also valuable; activities such as exploring new business models or restructuring your supply chain could help your business thrive in the long-term.

If you’re seeing increases to supply costs, it could be a good opportunity to renegotiate with your suppliers. They may be opportunities for win-win arrangements, such as a discount for paying invoices early. Another consideration could be placing larger orders to reach a better price per unit. You could also – depending on the nature of your supply chain – assess whether cheaper (but potentially slower) transport methods and routes are an option, or even whether any long-distance sourcing is still cost-effective for your business. Bear in mind the benefits that come from working with suppliers that understand your business and know your products well. Once you have discussed all avenues with your existing suppliers, it could be beneficial to see what alternative suppliers have to offer.²

Certain changes to technology and the way we work today have meant that some business costs which were traditionally fixed are now variable. Office space is a good example; large, expensive offices may no longer be necessary if staff are working remotely most of the time.³ Some desks in a co-working facility, with the ability to book meeting space when needed, might be all that you require to run your business effectively. Taking some time to review how your business operates day to day could reveal some ways to make big savings.

Spending money on new systems may seem counterintuitive. However, technology that improves efficiency and productivity could help your business withstand increases to costs elsewhere.² For example, investing in automation in certain activities could free up staff members to create more value for the business in other areas.⁴ Plus, digital systems with improved analytics could help reveal where further improvements could be made.⁵

In tough times, it is a good idea to focus your attention on the products or services that offer the best profit margin. But as a starting point, take the time to review the margin on every product or service that you offer.⁶ Some experts recommend doing this every quarter during periods of high inflation.⁶

Then consider focusing your efforts on profits, rather than other performance indicators, such as revenue or sales volume.⁷ Look at your most profitable products; what would it take to increase sales of that product by 10 or 20%? Could funds be diverted from less profitable products? 

Before passing any increased cost on to your customers by raising your prices, carefully consider your price point and strategy. How much of your product’s success in the market is down to its value point? Would increasing the price mean losing customers? In some instances, reducing prices (or bundling products together for better value) may be the smartest move, if leads to enough sales to offset the reduction in margin per unit.⁸ Similarly, some of your products may be more price-sensitive than others, so it’s important to have a deep understanding of your customers’ perception of value for money.⁸ If you do decide to raise prices, settle on figures that offer some room to absorb marginal further increases to your costs, to avoid putting them up again in a few months.⁶