Inflation figures for January 2025 were released last week and showed a surprising jump to 3.0%, up from 2.5% in December. Many businesses are already feeling the pinch of increasing costs and news that inflation is rising may not be good news.
Some economists believe that the rise will not affect the Bank of England’s plans for the interest base rate – the Bank has already forecast that inflation will increase to 3.7% later this year. However, regardless of this, inflation can squeeze profit margins and put a strain on cash flow. In this week’s blog we look at how you can mitigate the impact of inflation rises across key areas of your business.
Pricing strategy
During periods of rising inflation, it’s essential to review your pricing strategy. Ensure that your prices are reflecting the increased costs of goods and services. This can be easier said than done because of not wanting to upset your customers. So, one strategy could be to look at smaller, incremental increases rather than implementing one large hike. Also, be transparent about the reasons behind any changes – many customers understand inflationary pressure and appreciate it when they are clearly communicated with.
Efficiency improvements
Look for areas within your business where you can improve efficiency. Perhaps you have opportunities to eliminate areas of wastage, or there are processes that could be automated, or you might be able to renegotiate contracts with your suppliers. As an example, switching to digital invoicing or using cloud-based software may reduce your administrative costs. Small wins can be worthwhile as each small saving adds up over time.
Cash Flow management
When inflation is on the rise, managing healthy cash flow is crucial. Monitor your cash inflows and outflows regularly, and identify any areas of concern. If your business uses credit, try to lock in interest rates to protect yourself against potential rate hikes. You might also want to consider offering early payment discounts to customers to improve cash flow.
Stock strategy
If inflation is pushing up prices, holding too much stock may be tying up cash in goods that become more expensive to store. However, stocking up on items that are likely to increase in price could save you money in the long term. Review your stock levels on a regular basis and this will help you to strike a balance that protects your margins.
Value proposition
Inflation is likely to be putting pressure on your customers too. Therefore, it’s essential that you are able to highlight the unique value that your business is providing them. Focus on quality, reliability, or customer service so that you can show that you are different to your customers. When you offer something to your customers that they can’t get elsewhere, they may be more willing to accept price adjustments.
Market trends
Stay informed about broader market trends and how inflation is impacting the industry sector that your business is part of. By keeping an eye on your competitors and the behaviour of your customers, you will be able to adapt your strategy to stay competitive. Being proactive rather than reactive in seeking knowledge can make all the difference.
Inflation often runs in cycles, so it’s important to continue to think beyond the immediate challenges you may be facing. Developing contingency plans and building financial buffers can help you to prepare for future economic shifts. Businesses that plan ahead are more likely to emerge stronger once inflation subsides. If you need help with reviewing your business processes, cash flow or pricing, why not give us a call and see how we can help you?
