South African consumers and businesses can expect wide-reaching price increases during 2022 as global factors and local forces come into play. The question is, how do business owners prepare for inflation?
Already implemented is a massive fuel hike (1 March) that, among other things, increases the cost of raw materials and freight. With ongoing Russia’s attack on Ukraine, the global market is in disarray with both the rand and global oil prices pointing to warnings of even higher increases. We will also see a rise in the cost of electricity (1 April) and an increase in South Africa’s minimum wage (1 March).
Prepare for price hikes and inflation
There are two primary strategies you can adopt immediately if you haven’t already. The first is to maintain tight control on your business’s overheads and expenses and, wherever possible, secure prices from suppliers. The second is to increase your prices.
Update your forecast
You’ll also need to update your forecast. While planning for the future is always good, in uncertain times it’s more important than ever. And, no matter what industry you’re in, you should update your forecasts with the assumption that costs will increase.
To prepare for rising costs and inflation you need to understand how they’ll affect your margin and profitability because a consistent gross profit margin is key.
How to account for inflation
Accounting for inflation, for small business owners, means looking at last historical and present data, as well as market trends to predict your company’s future financial performance. This will help you to determine how much revenue you can expect in the period you’re forecasting, as well as how to plan for big expenses.
Compare your profit margins from the previous year with this year’s and note the percentage change for the year-to-date (YTD). With last year’s budget at hand, increase your product costs by the percentage increase you identified from last year to this year. This gives you the projected profit for the year providing, of course, that you increase your prices. Don’t forget to account for rising salary costs, too.
Once you determine how much you need to raise your revenue to achieve the profit margin you want, you can then calculate how much to increase your prices by, taking inflation into account.
Increase your prices? Yes or no?
Absolutely. Your costs will increase and your customers will expect theirs will, too.
The most simple way to increase your prices is to match the rate of South Africa’s consumer price index (CPI). However, consider your increase carefully. As things get more expensive as a result of inflation, unless you’ve lowered your cost base, your income is decreasing. In this case, your margins will be shrinking and your business will be failing.
For advice about using your business to create wealth, contact us today.