New Zealand’s Consumer Price Index (CPI) has increased by 5.9% from the December 2020 quarter to the December 2021 quarter. It’s the biggest jump in the last three decades, since June 1990 when there was a 7.6% increase. As a result of the pandemic many other countries in the OECD are also experiencing an increase in inflation.
What’s causing this current increase in the CPI can be split into these prominent factors:
Increased Commodity Prices & Supply Chain Disruptions Disruptions to shipping and the capacity uncertainty caused by the pandemic means we have seen an increase in shipping costs and a shortage in supplies. Take the global shortages in computer chips, the demand is soaring for computer chips but the supply is limited, which slows down manufacturing and pushes up the prices of products with computer chips. Increased Rent & Construction Costs As the population grows, inevitably more houses are needed, but rental supply isn’t keeping up with this population growth. Add into this the rising cost of construction due to global supply shortages and a lack of labour from overseas and it’s easy to see why prices are increasing. Domestic Prices Are Rising Domestic prices are also rising noticeably with household costs in total expected to rise by 7% this year. Rising food prices have been attributed to a number of issues including labour shortages and issues in the supply chain.
We understand that reading about increasing inflation isn’t exactly the most uplifting subject, and whilst there are no doubt going to be uncertain times that we need to navigate through, there is also plenty that businesses can do to weather this financial storm.
Assess Your Finances As Benjamin Franklin said ‘Fail to prepare, prepare to fail.’ So if you haven’t already, now is the time plan. Start with a financial forecast, how will you prepare for a what-if scenario such as supplier prices doubling.
Next is to run a financial WoF to identify where the price pressures are coming from and to see if there are any areas where money can be saved that won’t affect your overall business strategy:
Freight & Shipping: Have you factored in additional shipping and freight charges?
Suppliers: With suppliers increasing their costs, are you selling your products or services at the right price or do you need to increase your costs? Can you move to another supplier?
Wages & Salaries: As your staff will also be affected by rising prices, identify what is a fair and equitable salary to pay them. Broad cuts might be tempting but talented and committed staff can be hard to come by.
Cash Flow: Start to build up your cash flow and reserves to see you through periods of lower sales.
Competitors: Are your competitors increasing their prices? Can you match their prices or will your lower prices attract more customers?
Change What You Offer
It may be that increasing your prices is inevitable but this does come with the risk of losing clients who cannot keep up with your prices. If this is the case, it is is also worth considering:
Reassess your price model. Rather than increase your prices, can you offer the same price (or higher) but charged in a subscription model? Rather than one high single cost, a cost per month, per unit etc is often more manageable for clients.
If price is what drives your customer, look for ways that you can keep your prices constant by either offering less or removing unnecessary features or extras that won’t affect the quality of the product but will reduce the cost to you.
Streamline your portfolio, even if it’s temporarily. If there are areas that aren’t contributing to profitability but are time or energy consuming then consider pausing them to focus on the core products that are always in demand.
Save at Home When it comes to saving at home there are several steps you can take. Here are three to get you started:
Introductory Deals: Many internet or power providers offer introductory deals for the first 6 months. If you’re not tied into a contract, now is a good time to look at alternatives.
Grocery Deals: When grocery shopping it can be tempting to stock up on deals but only do so if they’re not perishable, you’ll definitely eat them or they’re easy to freeze, otherwise you’re likely to end up wasting it.
Switch Off: Whether it’s the tap whilst you’re brushing your teeth, your laptop after you’ve finished work or the light when you leave the room - it might sound obvious but turn things off and the little savings will add up.
Looking for business coaching or support with business planning? Get in touch with Grace Team Accounting today , call us on 07 578 5416