The Expert Podcast

Inflation as a business: how can you make that into a profit center and not an obstacle for your growth? Obviously, inflation is all over the news—whether it’s gas prices, supply chain, taxes—everything has an inflationary component. If you’re a smaller or medium business, you might think, “Well, it’s just something that’s gonna cost me money or less profit or maybe challenge my business growth.” In fact, inflation can be used by a business who’s clever to increase market share, increase profits, and even serve customers better.

Let’s take a look at five or six different actions you can take to increase your business. First of all, you want to know your customers, and if you evaluate them and your product mix, you can turn typical KPIs you may have looked at—profit margins, paper profits, accounts receivable—into actual cash. First of all, for customers, evaluate each one. Do some due diligence on each one, especially business-to-business customers. What is their cash pain point? How are they absorbing the inflationary components of their business?

How are they going to change their pricing? Remember when you first onboarded that customer, you probably had a sales department that performed some due diligence on that customer—maybe you looked them up on LinkedIn, you did some financial analysis of the customer. It’s possible that you did a little bit of a sales report on that customer that may have been several years ago, maybe 10 years ago. Even if it was two years ago, the customer is essentially a new model of a business client to deal with.

Evaluating their current scenario will help you maybe not change your offering to them but provide an offer to them in a way that might be more appealing. For example, if a customer is looking to cut costs because of inflation, if you’re the same offering that they had to evaluate a year ago or two years ago, you might get cut—your service might get cut from their budget. If you look at it like a new prospect, a new business offering, not only can you prevent yourself from getting cut as a budget item, but if you present your product as even more value-added, you might get more budget allocated to your offering, to your product or service.

How can you do that? Well, if they have to cut, let’s say, salary within their company, cut employees because of the fact that their cost went up on materials, if you can offer additional service to automate their manufacturing, to automate their customer service, maybe their fulfillment, you might be able to get a twenty or thirty percent increase in your budget to you because it helps them save a larger dollar off of their profit loss statement, off their chart of accounts.

So what happens is looking at things in terms of dollars, cash, instead of percentages is going to be important. You’ll see that theme throughout this whole list. A lot of times you look at a profit margin in terms of percentages—a percent of expense, a percent of net income. You want to look at actual cash. Inflation is about managing cash. It’s not about managing percentages or paper profits; it’s actual cash. In addition to all your P&Ls and your KPIs, start looking at your cash balances in your account or your corporate accounts every single day. That will help you see what’s going on with your business growth.

Number two: as you evaluate your customer base, you’ll find that some customers are expensive—meaning that your service of that customer might cost you more than really what it’s worth. Even though you may have a cost of sale margin, it costs you—you have a product that you buy for ten dollars and you sell for thirty dollars—you might think you have a twenty-dollar margin. But if it costs you ten or twelve or fifteen dollars to support that customer, or fulfill that customer, or management attention allocated to that customer, it might not be profitable.

So when you see those expensive customers, you can do one of two things: you can either fire them as customers, or you can restructure your arrangement with them. Maybe less customer service, maybe self-ordering, maybe automated ordering, maybe it’s not that they call up their salesperson and place an order and the salesperson has to jump through hoops—maybe it’s a portal that you provide for them. You, as the CEO or the manager or the president, need to know what’s happening—not only with your direct customers but to their customers.

If your clients have a customer base, what’s going on with them? If you have the psychology and mechanisms to look deep into their customers’ problems and their customers’ problems, you can help find solutions. But then also, it’ll give you judgment to decide which customers are worth keeping and which should be dropped or maybe lower priority.

In addition to looking at the customers, look at their debt. If you’re just pursuing market share without getting more cash, that could be a problem with inflation. You want to get customers that are paying customers. If they don’t pay you—net 30, net 45, net 60, whatever your terms are—you can’t afford to have them for long if they’re not going to pay. You need to look at their debt as well. If their business model is not going to be sustainable, if they start paying late, that’s something you want to know about. Maybe go to cash.

Maybe you can, in the course of inflation, use the inflationary news as a leverage point, a mechanism to up your price, but you can offer customers to keep your existing price by paying cash instead of building that net 30 or net 60. What that’ll do also is tell you which customers are maybe vulnerable.

Look, some customers don’t have the ability to pay cash; they don’t have the accounting ability to pay instantly or pay in advance. But if you have customers that you know—you up your price 20 percent but offer a discount by paying cash upfront—and they don’t take the 20, what does that tell you? That tells you it’s a significant percent. It’s not like you’re offering a two or three percent discount.

If you say, “Look, inflation has put up pressure on our margins, put pressure on our cost basis. As you know, you’re dealing with the same thing as a company. We have to go up 18 on our cost to you. It’s going to kick in in three to four months, but if you switch over to cash instead of net 30, we’ll keep you at your same price point.” They understand it. It’s not like you’re trying to jack them up on price. If they don’t take advantage of it, that might be a red flag. That might be a canary in the coal mine—that this customer doesn’t have the cash and you’re basically financing their business.

In an inflationary environment, you do not want to be financing a business because the dollars you get in 60 days are worth less than the dollars you get today. And if it’s 90 days, they’re worth even less. So financing for free by doing net 30 or net 60 might be even worse than just the delay in the payment—the dollars will be worth less because you have to pay for the goods today, and the dollars you get are in inflated dollars. That might indicate that they have high debt.

Then once you see where your customers are at, where your products are at, sketch out and outline the business model of what your products are. Take your whole chain of products and services and see how it impacts your business model and every link in the chain—your suppliers, your customers. Then you can use that to show your customers why you need that price increase. Show them how they can recoup it on their business model.

If you know what their business is and you go to them and say, “Look, I understand that this widget is going to cost, you know, 22 versus 14. I know that’s going to affect you, but here’s how it benefits your business model and how you can get some of that money back by these cost savings. We changed this widget so it has one less touch point for your employees or whatever the case might be.”

With regard to product, don’t cut your products necessarily. Don’t change them for the sake of cost only. Change them for the sake of how it’s going to benefit your customers. And that might be simplicity. Maybe if you have 40 varieties of something, you cut it down to 10. And you might think, “Well, the customer’s not going to be as happy.” Maybe they’ll be happier because they don’t have to sort through this whole list of different products.

Maybe you find ones that are more relevant to what their business is. You can’t make your product less desirable because your quality slips. And having 40 or 50 varieties might be less relevant to quality control. If you have 10 varieties, or 10 products, or 10 services, you can very easily make that quality control happen. And your customers will be happy for it because they’re going to look for any excuse to cut you when there’s inflation. If it’s a cost.

The overall point is: take a re-look at your company because inflation makes your business model of two years ago, three years ago irrelevant. If you look at what your business model is with inflation in terms of cost but also future dollar value, you can restructure your company to help your customers, your employees, and yourself. Maybe take on some cheap debt—even if you’re not going to use it—because paying it back in future dollars might be cheaper. Eliminate the things that do have a cost, but don’t eliminate things to make your company weaker.

If you have less customer service, if you have less quality products, quality supply chain—maybe the raw materials for your product—you don’t want to cut the cost of those if it’s going to make your product weaker or less competitive because that’s going to be the thing that your customer will look at as an excuse to get rid of you. Make your product better. It doesn’t have to be more expensive. It can even be simpler rather than more complex to be better.

Inflation can be your friend if you include it as a profit center in your business rather than look at it like a necessary evil.