Small business owners are feeling the effect of increase in prices of goods and services across the country. As we head toward the third quarter of the year 2022, it has become more challenging to run a profitable small business. Some of the common goods that have been mostly affected by inflation and experiencing exponential increases in prices include fuel and household utilities such as electricity, water, gas, food and transportation.
The Bank of Ghana stated during the Monetary Policy Committee meeting on August 17, 2022, that “On month-on-month basis, headline inflation rose by 3.1 percent in July 2022 compared with 3 percent in June 2022. The increase in monthly inflation was underpinned by increases of 3.3 percent and 3 percent in food and non-food inflation, respectively”.
On one end, the Ghanaian businessman is seeing their costs of doing business skyrocketing. On the other hand, the customers are looking for bargains and cutting back on their discretionary spending because inflation is taking a big toll on their budgets. Although high inflation is challenging for businesses, I will suggest the following steps small business owners can adopt to mitigate the effect of inflation on their cash flow and profits.
Cash flow management
The small business owner, as a matter of urgency, must pay attention to its cash flow, especially during this period when inflation is becoming the main issue confronting business operations. It is important to note that if your expenses are increasing and losing sales, or customers are slowing payments, the entrepreneur need to take appropriate actions quickly to mitigate the situation. Some steps to consider include reviewing expenses on a weekly basis, rather than at the end of the month or end of the quarter, in order to adjust.
Entrepreneurs need to be on top of their recurring invoices at any time or from any location. There is also the need to check the credit worthiness of every new customer who places a large order, run a credit check before filling the order or signing a service contract with them. Any customer who has an issue with credit checks must be compelled to pay in advance, as well as staying on top of all accounts receivable and especially not selling to past-due clients until they have paid their outstanding balance. Finally, entrepreneurs must avoid slow or late payments by requiring immediate payment, and also put in payments systems to make it easier for customers.
Cost reduction strategies
Although prices may be increasing, business owners may be able to counteract inflationary trends by reducing or eliminating some expenses. Some of the strategies for cost reduction include asking for lower prices from your suppliers and service providers. There is a need for the entrepreneur to find out what deals are being offered and how they can lower prices from the providers. It is also key to consider the cost drivers of the business, such as raw materials, electricity, water, salaries, phone bills, etc. and develop measures to reduce such cost. The pandemic also showed that the business will be able to reduce cost by downsizing their office operations and encouraging working from home and digitising their operations.
Eliminate unprofitable offering
Is your business stocking a lot of products that don’t move? Are you wasting food because some items on your menu are not very popular? Is your profit margin too low or non-existent on some offerings? I will advise small businesses to stop selling products and services that are not profitable, and run sales to clear out old inventory to bring in cash. Everyone loves a bargain, so it is important to offer your customers a package deal for most popular services. Entrepreneurs must analyse their business and look at which sales are most profitable. Be sure to look at all the details involved with sales, and look at your competitors who attract a more upscale clientele. What do they do differently from you? Do you need to update the look of your store or your website?
Creativity is key
Creativity is a crucial skill for an entrepreneur, and it helps in devising interesting processes and products/services. An entrepreneur must utilise full employee potential by encouraging creativity in the workplace. Every entrepreneur must pay particular attention to their business objectives, and look for innovative ways to cut costs and increase sales and cash flow without cutting corners that will alienate customers. Creativity encourages new ways of developing an existing product and service.
The writer is a Lecturer, University of Professional Studies Accra