• High inflation rates and other cost of living pressures in recent times are keeping confidence down among SMEs. Taking steps to keep a lid on fixed costs can help you maintain profits when margins are under pressure.
• Having a full understanding of your cost base will reveal where you could afford to cut back. You can also look at ways to improve efficiency, for instance by encouraging collaboration across teams.
• Finding ways to reduce waste, for example by using tech to eliminate errors, and disciplined financial planning can also help.

Even though key economic indicators in the first quarter of 2024 are more optimistic compared to 2023, there is still low confidence amongst small and medium-sized enterprises (SMEs) due to inflation having been so high for so long and the impact it has had on their profit margins¹.

What does high inflation mean for small businesses?

High inflation can create a challenging business environment for small businesses. From wage increases, as employees ask to be paid more to compensate for higher cost of living, to supply pressures as they pay more to buy materials and products.

It’s important for businesses to therefore closely monitor their expenses and adapt their strategies accordingly. Here are six ways to help you keep a lid on costs in your business and to protect the squeeze on your profit margins.

1. Gather evidence

Inefficiency is often a by-product of not understanding all the information you have at your disposal. Knowing your cost base and processes better will help you understand how to improve them. Start by asking your staff about the causes of rising costs, and how to limit them. But gather regular data as well, such as line-by-line item costs, and look at ways you can reduce each.

2. Break down silos

Create opportunities for cross-departmental conversation and collaboration to help break down silos, as this enables a holistic approach to cost-cutting. For example, when one department hands over a task or customer to another, is it seamless?

Be sure to model any cost-cutting initiative and consult with other departments before implementing to make sure it doesn’t have unintended consequences or negatively impact other parts of the organisation.

3. Increase staff morale to reduce churn

Low morale and high staff turnover can often cause poor productivity and inefficiency. Giving your staff clear career development pathways should encourage them to stay and support the business.

People leave managers, not companies, so turn your managers into coaches who aim to develop and mentor staff. Employees also respond well to firms with a well-defined purpose, so communicate yours clearly and regularly. These initiatives should help boost productivity, as well as cut recruitment costs and other inefficiencies associated with staff turnover.

4. Embrace technology

Optimise resources and boost efficiency by consolidating technology and embrace artificial intelligence (AI).

AI can be used to automate repetitive tasks, crunch big data and gain valuable insights, helping SME’s to streamline operations and optimise resources. For example, AI can be used to generate topic ideas for your social media marketing. It helps to predict which offers are doing well and which aren’t, helping to reduce costs by cutting unprofitable offers quickly .

5. Radically cut waste

Waste is often the biggest enemy of profit margins in an SME. Quick fixes to the problem of rising costs can end up costing you more in the longer term.

Often businesses panic and invest in areas such as another new piece of software, or replace ‘problem’ staff. But many solutions lie within the business and needn’t cost a penny.

The seven types of waste typically found in manufacturing have been well researched and documented as part of the lean management process. But other sectors are starting to apply a similarly disciplined approach to cutting waste. For example, in service businesses, consultants have identified that waste also typically occurs in seven areas:

• Duplication: A lack of clear job descriptions and roles can mean multiple employees are working on the same task, leading you to pay for more staff time than you need and wasting talent. Clarify roles and look at how to eradicate any potential duplications.
• Disjointed customer journeys: Companies often lose business when it is not clear what a potential customer should do next. [Or] when moving between departments, information is lost on the way – we’ve all experienced having to describe the same problem repeatedly on a phone helpline. Look for ways to smooth the user experience, creating efficiencies for you and your customers.
• Delays: Delays in providing information to customers, such as taking too long to respond to leads, deliver a proposal or follow-up an enquiry call can damage the customer relationship and create waste. Identify all such delays and eradicate them to make your business more efficient.
• Unclear communication: “Unclear verbal or written communication between teammates can mean hours wasted on projects with uncertain or unintended outcomes. Make sure all your communications are as clear, straightforward and joined-up as possible.
• Errors: use checking processes and automation to reduce mistakes, such as a customer receiving the wrong product or invoice.
• Lost opportunities: Often the most efficient way to do business is with repeat customers. In pursuing new leads, businesses sometimes forget to up, down or cross-sell with loyal, existing customers. This is a key waste area in service businesses and can be managed with a good customer relationship management system and processes for re-engaging with those contacts.

6. Disciplined financial planning

In an era of high inflation and squeezed margins, careful financial planning for you and your business is essential. A financial adviser can, for example, help you avoid unnecessary tax payments and take advantage of tax breaks and efficiencies. This includes helping you plan, invest and take income in the most efficient way.

A financial adviser can also use cashflow modelling to help you plan your personal budgets and stay on track with your financial goals as your situation and economic conditions change.

Speak to us today to find out more about our approach to financial planning and how it can help your business.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

We work in conjunction with an extensive network of external growth advisers and SME specialists, such as Elephants Child, who have been carefully selected by St. James’s Place. The services provided by these specialists are separate and distinct to the services carried out by St. James’s Place and include advice on how to grow your business and prepare your business for exit and sale.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Sources:

¹Federation of Small Businesses, ‘Small Business Index’, May 2023 (survey of 681 small business owners and sole traders between 27 March and 11 April 2023)