Is your small business prepared for the growing inflation?

Well, the latest information came out this week reporting that inflation is up by 7.5%. Likely, this did not come as a surprise to small business owners across the Treasure Valley as we have all been experiencing increases in our costs. Farmers have experienced a 20% increase in the cost of hay which results in higher food costs for restaurants and grocers, professional service companies are experiencing wage increases of up to 30% which results in fee increases to their clients, and trucking companies are dealing with higher costs at the gas pump (not to mention drivers on strike) which results in rapidly rising shipping costs of nearly every product purchased! At this point, it is fair to say that no business has been immune to rising inflation.

What do we do with this information? Perhaps, the better question, is what SHOULD we do with this information? I remember watching TV when I was little and quick public service announcements would come on with pieces of advice from celebrities like, “Stay in School!”, or “Don’t be a bully.” No matter the message, they always ended with the tagline accompanied by a shooting star; “The more you know” *Cue music.

The same is true now! The more knowledge you can arm yourself with, the better off you AND your company will be. Now, let’s be clear: Knowledge does not equal Information. Information is readily available about nearly everything online now with a quick click of a link on your iPhone and just because you can access the information, does not mean you are knowledgeable about it. In addition, the information most useful for you and your business is not found by a quick Google search. The information you need is specific to your business relating to your finances, business operations, and the overall market industry of your business. Before you get discouraged and overwhelmed, this data is available to you (or can be available to you). The big question that follows then is, do you know how to translate that information into knowledge?

Now, you know I’m tackling the financial piece first! My hope for all small business owners is that they have financial information available to them on a monthly (if not weekly!) basis that is accurate. Financial knowledge is not checking the bank balance to see if there is enough money to make payroll this coming week. Your current bank balance is information. Knowledge about your financial information might include the following:

• You have $30,000 in outstanding invoices to customers (and you usually get paid in 20-30 days),

• Payroll runs about $20,000 every two weeks (plus your payroll tax is another $5,000 that is paid one week after payroll),

• You have $15,000 of inventory to sell that usually turns over every other month at a gross margin of 50%,

• Accounts to be paid to your vendors run about $10,000 per week

• Your current bank balance is $25,000

• In reviewing your historical sales history, February is the slowest month out of the year with sales at 80% of average

So, sure – your bank balance has $25,000 in it. With that information only, you have enough money to buy a new car (well, maybe not with the increase in car prices lately)!! But, when you consider the other information, you know that a cash balance will be needed to make payroll in the next week and you better start following up with customers to bring those outstanding amounts in sooner, rather than later if you don’t want to get behind on your accounts payable. Businesses are far more complex than that, but knowledge is always greater than information.

The next specific information you need is on the business operations. We discussed gross margins a little bit in the financial area, but what data is available on how well each piece of inventory is selling? Do you have some items that turn over once per month and therefore, need to order more frequently? What about the processes involved in selling the inventory?

If you are in the medical industry, how many patients do you need to see each day? At what point do you need another doctor or nurse to support your operations?  Do you need a full-time person to oversee a department such as marketing or accounting, or, would a part-time or outsourced company be appropriate for that need?

Once you are armed with this knowledge, you can affect those gross profit margins and make decisions based on good information, such as, how much can you afford to pay your new employee, or does it make sense to invest in a new warehouse to store your inventory?  

After you have more knowledge about your operations, check your knowledge of the industry you are in. What specific areas do you rely on most to operate? What are areas that you measure your company against competitors? Are you involved in associations or societies that bring together a network of people to share ideas and best practices that are relevant to you? One of the best investments we make each year for our company is to invest in training and forums where we can further increase our knowledge in our industry.

Change is one of the only certainties we have in business. The way in which we prepare for the inevitable will determine whether our company can withstand the change that is coming. With anything, the knowledge you have going into the period of change will be what separates your company from the rest. Again, don’t fall into the trap of mistaking information for knowledge. We all have massive amounts of information. The question is, what are you going to do with that information?