Strategies to Manage Increased Costs and Margins During a Recession
Since the start of the pandemic, the economy has been a rollercoaster.On average, rent prices have increased by nearly six percent year-over-year, the cost of labor is the highest America has seen in 20 years, and the demand for materials is rapidly outpacing supply1. With costs fluctuating and inflation rising at alarming rates, businesses are struggling to maintain financial and operational stability. In order to survive in this environment, businesses are forced to take an in-depth look at their finances and develop strategies to alleviate cost increases, manage margins, and protect their bottom line.
How do cost increases and inflation affect a business’s margins?Recessions and cost increases are an unfortunate part of the business cycle. In the current economic environment, interest rates continue to rise, and businesses are finding it increasingly difficult to access capital funding and other lending options. In a time where companies are focused on remaining viable, the cost of lending is in some cases becoming too expensive for small and midsized business owners. In a world of fluctuating sales revenue, access to capital funding is key to avoiding cash flow disruptions and maintaining your competitive edge in the market.
Lending isn’t the only cost increasing, however. Organizations large and small are suffering as a result of a national staffing shortage. In the midst of the pandemic, when remote work became the new norm for many companies, workers and their families moved from busy hub cities to suburban areas. After a year and a half of remote work, businesses began transitioning back to in-office work, however many employees were not willing to give up their flexible work schedules – many even choosing to quit their jobs rather than go back into the office. To combat what some have termed the 'Great Resignation’, many companies began offering higher wages to attract talent – and it’s working. Workers are changing jobs at a rapid pace to take advantage of the wage inflation, resulting in reduced profit margins to maintain sufficient staffing.
Lastly, supply chains are a major factor when establishing costs and margins. While demand continues to accelerate, supply chains seem to be stalled in nearly every industry. With global production and delivery slowing down significantly, many companies are evaluating whether they should consider local suppliers rather than international. While investing locally is good for the micro-economy, the concern is increased production costs in the United States as compared to other global resources. With increasing labor costs, local production becomes even pricier.
Margin Management StrategiesHere are a few strategies you can use to help manage margins for your business during a recession.
In many instances, a company’s first line of defense against inflation is to update their pricing model to reflect current market conditions. While business owners often worry about the risk of losing loyal customers, keeping prices current is necessary to maintain profit margins. If you continue to provide the high-quality products and excellent service your clients expect, a slight increase in price is not likely to result in a significant loss of customers.
Develop a Pricing Strategy That Reflects Current Market Conditions
Prioritize Existing Customer RelationshipsBuilding a loyal client base is essential to the success of your business. A study conducted by Marketing Metrics states the probability of selling to an existing customer is up to 14 times higher than the probability of selling to a new customer2. Additionally, Bain & Company and Harvard Business School report that increasing customer retention rates by 5% increases profits by 25% - 95%3. Consider implementing a loyalty program; they’re relatively inexpensive, can help boost revenue, and create extra “buzz” around your business.
Secure Liquidity Before You Need ItWhen unexpected expenses or opportunities arise, you don’t want to scramble to find cash. A business line of credit offers you the flexibility to access the funds when you need it, repay, and then access the funds again. The best part: you only pay interest on what you borrow. Whether you want to use it for overdraft protection, seasonal costs / inventory, or just as a safety net, a business line of credit gives you the liquidity necessary to keep your business running smoothly.
Focus on Talent RetentionWith workers hopping from job to job to find higher salaries, better benefits, and increased flexibility, ensure your business is focused on competitive offerings to retain talent. Consider investing in professional development opportunities, promotions, and cross-training for your current employees, and strive to offer unique benefits and perks that will give your organization a competitive edge.
Times like these provide an opportunity to take a step back and analyze what’s working and what needs improvement. To maximize your dollars, ensure you have efficient processes in place. Conduct a review of your business’s operations and determine areas where you can cut costs or change vendors to improve the bottom line. For example, moving away from manual invoicing, could help eliminate time spent and human errors. To accelerate and streamline your invoicing, go digital with a platform like SouthState’s Treasury Navigator.
Explore Process Improvements to Streamline Operations
How to Profit During a RecessionRecessions are an unfortunate part of entrepreneurship, and your business will likely struggle in the midst of an inflated economic environment. However, a recession doesn’t have to be catastrophic for your company. If you take proactive measures, tightly manage your operations, and keep a close eye on your margins, you can put yourself in a solid position to withstand the turmoil of a recession. For more information on how to recession-proof your business, click here.
About the Author, Ed Jenkins: Ed Jenkins is a Commercial Banking Team Lead with SouthState Bank. He and his team manage a diverse portfolio of mid-size and large commercial banking clients in the Atlanta market. Ed has been with SouthState Bank and its predecessor Atlantic Capital Bank for 15 years. Ed is a native of Gainesville, Georgia and earned his BBA in Accounting at the University of Georgia. He and his wife, Carter, are the proud parents of 5 children and 2 grandchildren. When he is not helping clients with custom lending solutions, Ed enjoys spending time with family, photography, and being outdoors across Georgia and the rest of the Southeast.
Average Rent Increase in the U.S. in 2022 | Credit Karma, Labor cost increase hits the highest level in 20 years amid worker shortage in economy - The Washington Post,
Marketing Metrics - PaulFarris - 9780137058297 (46) (pearson.ch)
The Economics of E-Loyalty - HBS Working Knowledge - Harvard Business School