The pandemic has done a number on the supply chains and manufacturing and it doesn’t look like it’s ending any time soon. But there is a secret to protecting your business against the recession.
These issues have probably wreaked havoc with your cash flow as your ability to service customers has been disrupted or delayed.
I’ve seen plenty of service business owners compensate for all this uncertainty by buying products in bulk and stocking up on inventory when they have the opportunity to buy.
This is a smart move in the short term since we can’t be too sure when the next shipment of what you need may come in, it could be 6 weeks or it could be 6 months, but if you’re not careful it could cost you big time in the long run.
And to exacerbate the problem, your costs are increasing (cost of goods, cost of labor, financing jobs, and well… everything has gone up!).
So let’s talk about these 2 big issues and what they mean for your business.
INVENTORY
This environment of uncertainty is leading business owners to stock up on inventory like people hoarded toilet paper and sanitizer at the beginning of 2020.
For the moment, having extra inventory on hand will help with delays and make sure you can keep servicing your customers, but there are some very important elements you need to be aware of.
First, tying up your capital in inventory takes your liquid assets and turns them into fixed assets. This means your cash flow is going to be affected, and you won’t as easily be able to absorb shocks to your income.
One big unforeseen expense could result in massive losses.
Cash flow is the buffer that shields your business from hard times.
If you’re barely scraping by each month and just covering your expenses because you’ve doubled the amount of money you have invested in inventory, you have much less margin for error.
The second is that inventory comes with additional headaches and costs. You need to find a place to store everything safely and securely.
You also need a system that can expand to track, label, and manage everything without the costs scaling up too much.
And thirdly, you need to understand the tax implications of carrying all that additional inventory into 2023. Depending on where you operate, you could be unhappily surprised by a larger-than-expected tax bill.
Now, more than ever, you need a firm grasp of the important numbers in your business including your expenses, profit margins, labor costs, and you need to work with an accountant that can help you make decisions on how much you can afford.
Fortunately, we can help with that!
If you want to have a seasoned professional on your team that can help you through these difficult times, you can book your consultation right here and we’ll connect with you on how we can work together.
RISING COSTS AND RAISING YOUR PRICES
Many businesses are having to raise their prices in 2022 to stay profitable and keep their doors open, and you might be thinking along the same lines.
It will allow you to create higher revenue (at first glance) and potentially get ‘premier’ clients looking for a more high end service. An extra benefit is that being a premium service does not necessarily mean fewer sales, as your customer base changes to adapt.
But I want you to go into this with open eyes…
You may lose sales because of it, you may get negative feedback and it’s hard to backtrack once you’ve already lowered your pricing. You want people to value your service vs thinking you are the ‘low budget’ service.
There are some things you’ll want to consider before raising your prices…
Consider adding additional features or value to your products or services to make raising your prices more palatable. You can also highlight a feature of what you already do if it has never really been promoted before.
Pricing is partly about perception. If you can increase the perceived value of what you’re offering a price increase could be more easily accepted.
Do your analysis before making a change and try to find out if your market will support it. Understand the budgets of current customers and inbound leads. If your customers are struggling to pay your current price, raising your prices won’t be immediately positive.
Try offering a higher-tier service at a higher price point alongside your existing offerings as a test. If your customers are accepting the new solution, you can phase out the old offering over time. You can even offer your current customers to be grandfathered in if they commit to a contract length or some other arrangement.
Check your infrastructure. Could you support a rush of people that want to be grandfathered in at an older price? Are you willing to cut staff if you lose customers?
The bottom line (pun intended) is that raising your prices may be the solution your service business needs to continue being profitable going into 2022, but you need to go about it strategically before making sweeping changes.
If you want help understanding the most important numbers in your service business so you can make changes like this with confidence, we’d love to help you! Schedule your call with us today and we’ll get you connected with an advisor who can get you started.
