Hola/Hello!
Before becoming my own JEFA (Spanish for BOSS), I worked in the finance industry for over 7 years, from wealth management to investment banking and financial education. I even earned a master’s in finance from the University of Utah—that’s how much I love the impact of money.
As a business owner myself, inflation has touched every aspect of my business and personal life, from higher costs in transportation to meet with clients and labor for contracted employees to increased costs for housing and groceries. There’s only so much I can control with my business when it comes to these increased expenses, but here are some things I’ve done to offset the costs:
- Estimate operational expenses ahead of time through budgeting. A business budget is important for understanding where your money is going, especially in times of high inflation.
- Reduce any operational costs that are not essential to day-to-day operations. For example, I reduced my software costs by removing subscriptions to products I don’t use often and finding free alternatives that do the job.
- Increase service fees. To offset rising costs of labor, goods, and materials, I’ve increased our prices for our goods and services by 5% to maintain our profit margin goals.
Budgeting for your business
A business budget is similar to a personal budget. When creating a business budget, it is important to not overthink it. Budgets are estimates of how much money you are going to make in revenue for the month and how much your estimated fixed and variable expenses will be. So, how do you get started?
The Formula: Revenue - Fixed Expenses - Variable Expenses (Including Taxes) = Net Income
If you are more technologically oriented and love spreadsheets, this is where you're going to start estimating your budgets for your business. I like to start with the business’s expenses because it gives good insights into what your business has to make at minimum before you start making any money.
If you have QuickBooks, you can leverage your QuickBooks Income Statement, also known as a Profit/Loss Statement, to help you understand where your business’s money is. If you have QuickBooks Online Advanced or Plus, the software can help you do this without having to use a spreadsheet. (Software sometimes makes life so much easier!)
Revenue is always going to be based on your past earnings plus your estimated growth rate. I like to take an average of the last quarter to give me an estimate of my revenue for the month. As a business owner, your goal is to grow your business through generating more revenue. So, look into what your growth rate is to help you estimate how much your profits will grow every month.
Reducing operational costs
Now that all those numbers are out of the way, let’s talk about how you can leverage your budget by reducing or removing operational expenses during times of high inflation. For example, due to the high demand and increased costs of material, my father had to make some adjustments to his landscaping business to serve his clients. He changed suppliers for materials and even looked into sourcing his supplies from other states.
Youmay be paying for expenses that you do not need, such as software you don’t use or products that don’t sell. Maybe you need to reduce labor because your business isn’t as busy as you expected.
Just because you’re used to doing things a certain way does not mean that they need to stay that way. Think critically and creatively about what you really need to run your business. If you become too attached to your expenses, they could bring you down in the long run. Regardless of the scenario, as long as you find one thing to pare down or eliminate, you are taking a step in the right direction to help you save some money.
Raising the prices of your product/service
Sometimes the solution is to charge more, not only because you have worked hard for it, but also because inflation is impacting your cost of labor and so many other expenses. Charging more can be intimidating, but you don’t have to increase your price of goods or services by 20%. As a business owner, you have the liberty to make these types of decisions. Even a 3% increase could go a long way toward easing the strain that the rising costs of goods and materials are causing for your business.
Preparing for economic downturns
My final and potentially most important tip for preparing for any economic downturn and moment of high inflation: Save for that rainy day! I repeat, SAVE for that rainy day.
You’ve heard that you should always keep 3–6 months’ worth of living expenses socked away as a personal emergency fund, right? Well, you should do the same for your business. Always make sure you have 3–6 months’ worth of your business operational expenses saved. Its purpose is to keep you afloat in case of reduced sales and increased costs that could impact your business. Think of this as your business security.
Another thing to consider if there is an economic downturn is how to realign your business to ensure you can make revenue. Are you creating additional sources of income within your business? For example, within my business, I have multiple sources of income. In addition to coaching clients, my revenue comes from workshops, collaborations, and even ads—all things that I can still make money from even if I see a drop-off in coaching clients.
As a business owner, ask yourself this question: Is there anything in my business that can be passive income? Or can I add something that is low cost to me but has a higher selling price to consumers/clients? Start with something small, such as adding a happy hour for your restaurant or a subscription for your yoga classes.
Depending on your business type, inflation can really eat up your profits. But remember, economic downturns are temporary. Our goal as entrepreneurs, CEOs, and business owners is to keep our business afloat, staff supported, and clients satisfied.
Thank you for reading this post about inflation and the impact it has on running a business. The experiences and tips I’ve shared here should have you thinking of ways to strategically change your business in this current economic climate. Make sure to check out more of the QuickBooks Ask the Expert series for information on other topics related to making your business as successful as it can be!
Bendiciones/Blessings,
Lea Landaverde
