Inflation is everywhere these days — gas prices have skyrocketed, the prices of raw materials are at astronomical levels, and the costs of grocery items like produce, meat and bread have shot up. That said, your business clients may be struggling to maintain their ever-increasing operational costs and maximize profits. It has definitely been a stressful situation for so many companies that have already been struggling due to the COVID-19 pandemic.
Do you want to help your business clients maximize their financial health during this difficult time? In my experience as a CEO, I have discovered many ways accountants can help their commercial clients adjust their financial plan to inflation. Here are three proactive measures to take right now:
1. Encourage your clients to fine-tune the prices of their offerings. Take a long look at your clients' operational and/or manufacturing expenses. Has the cost of the contractors’ labor gone up? Have the skyrocketing prices of raw materials made it a lot more expensive to produce the goods the business offers? Is the cost of shipping items to customers higher than it has ever been in the past? Well, if your clients are currently dealing with any (or all!) of these scenarios, work with them to adjust their product/service prices to account for labor and production cost increases stemming from inflation.
Because production costs have gone up, it is vital for your clients to adjust their selling prices accordingly. This will help them maintain the same profit margin level that they had before this era of inflation. To do this, calculate the exact percentage that the cost of producing one of their products has gone up by. Then increase the price of that finished product by that same percentage. If the business offers various products at different price points, calculate the production cost percentage increase of every product and tell your client to adjust its sale price accordingly. This should help your client offset rising business costs so they can maximize their profit margin and maintain the same level of quality of their services/products for their customers.
2. Tell your clients to purchase raw materials in bulk ASAP. Does your client have to purchase wood, metals and other raw materials to produce their goods for sale? They likely purchase these items in bulk on a regular basis, such as biweekly, monthly or quarterly. Well, encourage them to buy these items in bulk today or as soon as possible, rather than wait for their next scheduled purchasing cycle. Inflation on these items could continue to increase for the foreseeable future. So if the company buys their raw materials in bulk as soon as possible rather than waiting, they will limit the impact of inflation on the overall cost structure of products/services offered to customers.
Think about it — say they regularly purchase $10,000 worth of raw materials on the first of every month. And from now until next month’s purchasing cycle, inflation causes the prices of all the raw materials to go up by 7%. That is an increase of $700, which could have been put toward new marketing initiatives to help the business sell more products. If their production costs increased by $700, then they would have to increase their products’ prices accordingly, which could cause them to potentially lose customers. That all said, if they purchased their order of raw materials in advance, they wouldn’t have to incur the $700 inflation-induced price hike.
3. Account for inflation in all financial projections. As your business clients' accountant, you likely make financial projections and estimates on a regular basis. This is critical for analyzing how you can help them increase profits and improve their overall bottom line. There are so many elements to plan for, such as the total estimates of every project and the prices of producing the products and services they offer. You likely also make a projection of their total profit margin each quarter, which allows you to plan ways to help them increase the profit margin of the next quarter. Therefore, make sure to account for inflation in these estimates!
If you don’t account for inflation in these projections, you can be grossly underestimating your clients’ total costs, which will lower the profit margin you thought they would achieve. If their production costs’ inflation has been steadily increasing for months, it’s safe to say this trend could continue into the future. So take this into account when you make estimates for their upcoming project budgets, other operational costs, and target profit margins.
Help your clients with cash flow estimates
As accountants, we all know how incredibly important cash flow is for every business owner — it depicts how much cash their enterprise is earning and spending in a specific timeframe. So help your clients consider how inflation will impact their cash flow projections and buying power so that they can more accurately project their cash needs. Also, because cash is considered a company's most liquid asset, your business clients will first check their available cash when they need to make urgent purchases, pay an invoice, handle payroll, etc. — this prevents them from having to take out loans or pursue other funding options.
Therefore, it’s pivotal to project your clients’ cash flow in order to ascertain how much cash will be available on-hand at a moment’s notice. Make sure to account for any current and future inflation to have the most accurate picture of your business clients’ cash flow. If you don’t include inflation in your projections, you can greatly overestimate the buying power of your clients’ cash on-hand. This can cause them to make ill-informed business decisions that can spiral into financial struggles down the line.
Inflation is currently plaguing so many companies, but there is no need to fret over it wreaking havoc on your business clients’ operations and financial health. With proactive planning, you can help them continue maximizing their business’ bottom line in this era of inflation. Make sure to help them adjust the prices of their business offerings to account for labor and production cost increases. Also, encourage them to buy bulk raw materials as soon as possible, rather than waiting for their next purchasing cycle, and account for inflation in all financial projections. By taking these measures, you will help your business clients rise above any inflation-induced cost increases and thrive in the long run.
