Inflation is everywhere these days – gas prices have skyrocketed, commodity prices are at astronomical levels and the costs of groceries like produce, meat and bread have soared sharply. That said, your corporate clients may struggle to keep their operational costs rising and maximize their profits. It has certainly been a stressful situation for so many businesses that have already struggled due to the COVID-19 pandemic.
Do you want to help your corporate clients maximize their financial health during this difficult time? In my experience as a CEO, I’ve discovered many ways accountants can help their business clients adjust their financial plan for inflation. Here are three proactive steps you can take now:
1. Encourage your customers to adjust the prices of their offers. Take a long look at your customers’ operating and/or manufacturing expenses. Has the labor cost of contractors increased? Has the rise in commodity prices made it much more expensive to produce the goods offered by the company? Is the cost of shipping items to customers higher than it has ever been in the past? Well, if your customers are currently facing any (or all!) of these scenarios, work with them to adjust their product/service prices to account for increases in labor costs and production resulting from inflation.
As production costs have increased, it is essential for your customers to adjust their selling prices accordingly. This will help them maintain the same level of profit margin that they had before this era of inflation. To do this, calculate the exact percentage increase in the cost of production of one of their products. Then increase the price of that finished product by the same percentage. If the company offers various products at different prices, calculate the percentage increase in the cost of production for each product and tell your customer to adjust their selling price accordingly. This should help your client offset rising business costs so that they can maximize their profit margin and maintain the same level of service/product quality for their customers.
2. Tell your customers to buy raw materials in bulk as soon as possible. Does your client have to buy wood, metals and other raw materials to produce their goods for sale? They probably buy these items in bulk on a regular basis, such as every two weeks, monthly, or quarterly. Well, encourage them to buy these items in bulk today or as soon as possible, rather than waiting for their next scheduled buying cycle. Inflation on these items may continue to rise for the foreseeable future. Thus, if the company buys its raw materials in bulk as soon as possible rather than waiting, it will limit the impact of inflation on the overall cost structure of the products/services offered to customers.
Think about it – let’s say they regularly buy $10,000 worth of commodities on the first of every month. And by next month’s buying cycle, inflation is driving up the prices of all commodities by 7%. This is a $700 increase, which could have been spent on new marketing initiatives to help the company sell more products. If their production costs increased by $700, then they would have to raise their product prices accordingly, which could potentially cause them to lose customers. That said, if they purchased their commodity order in advance, they wouldn’t have to suffer the inflation-induced price hike of $700.
3. Consider inflation in all financial projections. As an accountant for your client companies, you probably make financial projections and estimates on a regular basis. This is essential to analyze how you can help them increase their profits and improve their overall bottom line. There are so many things to plan, such as the total estimates for each project and the production prices for the products and services they offer. You probably also project their total profit margin each quarter, allowing you to plan ways to help them increase the next quarter’s profit margin. Therefore, be sure to factor inflation into these estimates!
If you ignore inflation in these projections, you may grossly underestimate your customers’ total costs, which will reduce the profit margin you thought they would make. While their production cost inflation has been steadily rising for months, it’s safe to say that this trend could continue in the future. So take that into account when making 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 extremely important cash flow is to every business owner – it represents the amount of money their business is earning and spending within a specific time frame. So help your clients think about the impact of inflation on their cash flow projections and purchasing power so they can more accurately project their cash needs. Additionally, since cash is considered a company’s most liquid asset, your business customers will check their available cash first when they need to make urgent purchases, pay a bill, manage payroll, and more. other funding opportunities.
Therefore, it is essential to project your customers’ cash flows to determine the amount of cash available at any given time. Be sure to factor in any current and future inflation to get the most accurate picture of your trading customers’ cash flow. If you don’t include inflation in your projections, you risk significantly overestimating the purchasing power of your customers’ cash. This can cause them to make ill-informed business decisions that can escalate into financial hardship.
Inflation is currently plaguing many businesses, but there is no need to worry as it wreaks havoc on the operations and financial health of your client businesses. With proactive planning, you can help them continue to maximize their company’s bottom line in this age of inflation. Be sure to help them adjust the prices of their trade offers to account for increases in labor and production costs. Also encourage them to buy commodities in bulk as soon as possible, rather than waiting for their next buying cycle, and consider inflation in all financial projections. By taking these steps, you’ll help your business clients weather any inflation-induced cost increases and thrive in the long run.