Inflation has been big news recently, as its continuing rise has forced prices skywards. This has hit everybody hard, and many businesses are struggling to strike the balance between continuing to offer their goods and services and remaining a competitive choice for their customers.
Every business is trying to find its own way to contend with this issue. Here, Rogers Spencer, chartered accountants in Nottingham take a look at the ways in which family-run businesses can limit the impact that inflation has on them.
What is inflation?
Inflation is the way in which we measure how much prices are rising over a set period of time, which is usually a year. It tends to be used to determine how much the cost of living for the average family has changed and so the government conducts surveys to work out what items might be found in a typical shopping basket.
It then tracks the prices of these items over time to determine how much purchasing these goods would cost. If household income does not increase in line with the changes in these prices, then households are worse off as their money will now buy less than it used to.
Whilst we might occasionally see headlines that show the rate of inflation has dropped, it is important to remember that this does not necessarily mean that prices are going down, it simply means that they are going up less quickly.
For businesses, inflation means that the cost of the raw materials that they buy will rise, and eventually this cost will need to be passed on to their customers in order to survive. However, when customers are also feeling the pinch, they tend to become more discerning in how they spend their money and who they spend it with.
This means that competition for business can become fierce, as with some customers cutting back and not buying the things that they used to do, the pool of customers to compete for becomes smaller.
In times of high rates of inflation, businesses need to think carefully about how they operate in order to be successful. One of the most important things that they need to ensure that they have is continuity. High levels of staff turnover and rapid changes in leadership can destabilise a company at a time when it needs to be secure. In a family business, continuity is something that can easily be put in place.
When the majority of your workforce, or certainly the most crucial members of it, all come from the same family, it is possible for you to feel more confident that they will not jump ship and go elsewhere. Family members tend to stick together even though they might have ordinarily moved on to pastures new, as they all have a vested interest in the success of the business.
One way to ensure continuity is through succession planning. The more senior members of the family business can create a plan based on who they want to take over from them when they decide to move on or retire, and this will usually come from within their family.
This allows them to spend time training up their son, daughter or even grandchild to take over from them, and means there will be a much smoother transition and less upheaval. For the new incumbent, there will be fewer surprises in store, and the business can continue running in an effective and consistent way.
Often businesses can focus solely on one type of customer, and if they are the ones hit hardest by inflation then your business can suffer very quickly. As family businesses tend to have a number of generations working within it, you have a unique way of diversifying.
With family members of different ages and in touch with different trends and interests, but all with an equal amount of trust, it is much easier to identify new directions for the business to take, ensuring that you have different income streams available to you.
As your family are the people you can rely on to be honest with you, even brutally honest at times, these are the people you can trust when it comes to tough decisions. Whether you are looking at pricing, systems, marketing or cash flow, the people closest to you in the business and at home are the ones who will give you their real and considered opinion and not just the one they think you want to hear.
Whilst employees will be understandably more concerned with looking after their own interests and not wanting to cause offence to those higher up the chain, family members can be candid in their appraisal of things as they all want what is best for the business. This puts you in a better position to make good decisions for the business.
Family businesses tend to be smaller businesses, and these are often the most vulnerable in difficult times. You therefore need to look at what strategies will work best for you when the pressure is on. One thing that you might want to consider is how you approach business contracts. Whilst you might normally want the security of long-term contracts, this isn’t always the best policy in times of uncertainty.
This is because shorter-term contracts can allow you to negotiate better pricing deals and easier exits, which means that the risks your business is exposed to are managed better. Longer contracts tend to come with a lot more limitations and can be harder to walk away from, so they could turn out to be less profitable than you might have first thought.
A family business has some unique strengths that it can draw on when times get tough and it is important to make the most of these. With inflation set to stay high for some time to come, it is a great opportunity to make the most of your position and protect your family business in a way that allows you to weather the inflation storm.