In the years since the Great Recession, businesses have experienced a Goldilocks decade, with low interest rates, a low rate of inflation and high profit margins. But that has changed in the last 18 months, as inflation soars and interest rates continue to rise.
“The easy money days are over,” says Sam Agresti, CPA, director, Brady Ware & Co. “Through that cycle, many businesses got sloppy and away from the basics. As the economy is tightening, now is a good time to assess what your business is doing, where it stands and what your financials look like.”
Smart Business spoke with Agresti about how to manage your business through this period of increasing inflation and interest rates.
How can companies start to assess their business stands?
From an inflation standpoint, you need to understand your business to know where you are making your money. What sales are profitable? Is the gross margin enough to cover operating expenses and yield a healthy profit? Has the gross margin on sales narrowed due to inflation? And you need to look at areas of your business that may have become unprofitable and determine whether it still makes sense to be operating in the area of your business.
With the increase in interest rates, keep an eye on balance sheet management. Are you staying on top of your cash collections? Are you turning your inventory? Should you use more cash and less debt for equipment purchases as the result of higher interest rates?
One the largest cost increases has been in labor, as wages increase in an attempt to keep up with inflation and worker shortages. In this current labor market, some tough decisions may need to be made. Does it make sense to stay in marginal lines of business where staffing needs are difficult to meet and the costs of labor outweighs the potential reward?
How are increasing expenses impacting businesses?
If your business is being impacted by inflation and you haven’t made the necessary adjustments, you are probably not making the same money you were a few years ago. Take a close look at your customer base. If you have a low-margin customer, does it make sense to keep them, or would it be more profitable to step away? If you are breaking even or losing money, that puts a strain on internal operations. Shedding and walking away from low- or no-margin customers can free up your employees to pursue higher-profitable business, especially if you are already short-staffed.
Businesses should also assess their product mix. If you are producing A, B and C, and C is less profitable, consider shuttering that line of business, cutting staffing and focusing on A and B. Again, keep in mind employees have been stretched, and employers need to work harder to keep the good employees they have. Have them focusing on profitable business instead of stretching them and having them deal with low-margin and unprofitable accounts.
How can an outside adviser help analyze the business and its profit margins?
A third party can look at how the business is functioning. Sometimes an owner is down in the weeds and it can be difficult to assess where you might need to make changes to increase profit margins.
Make sure your numbers are tight and accurate, and you have a clean set of books, because otherwise an adviser won’t be able to do an accurate analysis. Often, owners think they are making money, but they aren’t allocating for expenses like payroll taxes or other operating expenses. Once those are added in, often the business is not making as much as the owner thinks — or anything at all.
An analysis will help an owner determine why they are doing something, especially if it’s at a low profit margin. Are you trying to get your foot in the door? Expand a relationship? Knowing the why, you can look at it as an investment decision with strategic reasons behind it.
Knowing your costs, profit margins and operating expenses, and using debt efficiently, are more important than ever in this current business environment. The decade of easy money is over, and every company can benefit from taking a closer look at their business and where it is making money — and where it’s not. ●
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