5 Ways SMEs Can Weather Inflation

The high producer price index (PPI) is hurting many businesses nowadays. Although it’s good news that the world is facing post-pandemic recovery now, it’s one of the reasons why skyrocketing inflation is looting worldwide. Consequently, many small and midsize enterprises (SMEs) have to deal with issues related to supplies, costs, and wages. 

There are ways businesses can weather rising inflation. They may go the traditional path—push through price spikes in tune with PPI and cut costs to enhance productivity. Then, supplement it with future-proof strategies, including reducing dependence on volatile labor markets, boosting top-line revenue, and improving employee retention. 

To achieve these, here are five things businesses should do. 

Evaluate the Company’s Financial Health

Note that beating inflation requires more than just cutting costs. It involves building credit, thoughtful reinvestment programs, and scalable growth to deliver better purchasing and pricing strategies. Start with assessing the SME’s current financial condition. Among others, focus on the business’s net income, operating profit margin, and debt ratio. 

The net income determines a company’s overall profitability. It reflects how effectively an SME has been managed. To calculate it, take the company’s total income and subtract its total expenses. If the result is high, the business is earning and growing. 

Operating profit margin, in contrast, indicates a company’s cost management and sales generation. It reflects how effective SME leaders are at tracking expenses and generating revenue. To calculate it, simply deduct the company’s earnings from interest and taxes. If the result is positive, the company’s core operations are efficient and can generate net income.

Debt ratio matters as well. It determines the proportion of a company’s assets financed. It reflects an SME’s ability to deal with outstanding liabilities. To calculate it, divide total debt by total assets. If the result is high, it’s not a good sign. It can be interpreted that a company borrowed more money than it can pay back conveniently. 

Increase Spending Visibility

Once the assessment is completed, ensure spending transparency. Spending visibility is a company’s understanding of where, how, and why the capital is used in business operations. It’s essentially the basis of expense management.

However, it goes beyond the simplistic practice of expense tracking. It requires real-time tracking of business expenses, running spend analysis, optimizing procurement processes, and, more importantly, ensuring the effectiveness and efficiency of spending. 

The benefits of having a detailed and clear spending visibility includes: 

• Determine basic cost-saving opportunities
• Improve spending efficiency
• Eliminate over-expensive suppliers
• Better procurement strategy
• Make cash forecasting capabilities clearer
• Determine internal budget allocation imbalances
• Reduce frivolous spend

All of these advantages help weather volatile periods. Besides helping to pinpoint the real drivers of business costs, a repeatable, end-to-end, actionable spending visibility enables SMEs to determine actions to protect their margins and market share against inflation. 

Identify Strategic and Nonstrategic Cost-Cutting

Many SMEs resort to broad-based cost-cutting to solve inflation’s effect on their profitability, free cash flow, and investment agenda. However, many do so in a way not aligned with their business strategy. 

These wrong cost-cutting methods typically don’t yield an optimal return on investment (ROI) but only jeopardize SME’s long-term business goals. What they should rather do is distinguish strategic and nonstrategic costs. 

The rule of thumb is to cut nonstrategic costs. Determine which investment to pull back and costs to trim and improve the ROI on operating costs. Then, invest in strategic costs heavily. Spend more on strategic capabilities that ensure considerable business growth. 

These actions help SMEs reshape the operating model, cost structure, profit and loss (P&L), and capabilities that need to be best in class vs. best in cost. When applied, these guarantee profitability and competitive advantage despite operating in a disruptive environment.

Embrace Hybrid/Remote Work

Another way to reduce costs is to adopt a hybrid work model for the SMEs’ regular operations. Implementing it can significantly reduce office costs by up to 40% by downsizing workspace and saving on utilities, parking spaces, and rent (if applicable). This cost-saving benefit will significantly increase with remote work. 

Besides saving on operational costs, both hybrid and remote work arrangements are labor-friendly, which helps retain talent. Getting remote-ready is also a good way to future-proof a business against another pandemic, economic crisis, and technological trends. With the widespread digital transformation, hybrid and remote work is here to stay.

Adapt Digital Transformation 

Automating business processes through technological solutions doesn’t only increase productivity but also reduces costs. Specifically, it eliminates errors and non-value-added activities while speeding up operations. 

With this ability to lower operating costs and increase efficiency, automation can also slow or even counter inflation’s effects. In fact, due to its deflationary aspect, 78% of chief financial officers (CFOs) will maintain or increase their enterprise digital investments despite their upfront costs and even if inflation persists.

Final Thoughts 

Inflation is a challenge everyone faces. Thankfully, with some smart planning and careful adjustment of standard business practices, SMEs can not just survive this storm but thrive. As long as they play things right, combating inflationary pressures can be within their reach.