5 Best Hacks to Combat Rising Costs and Shrinking Profits

Discover the steps you can take to weather tough times, from cutting costs without cutting quality to making money during rough patches.

Small and medium-sized enterprises (SMEs), ranging from local coffee shops to tech startups, are crucial to Canada's economy, employing millions of Canadians and representing more than 50% of our nation’s gross domestic product.

As we move through 2024, however, Canadian SMEs are encountering significant headwinds—above all, rising costs and shrinking profit margins that threaten their growth and, even worse, their very survival.

Here, we examine the practical steps that you, as an SME owner or decision-maker, can take to weather these tough times, from cutting costs without cutting quality to making money during rough patches.

SMEs face a convergence of financial challenges every day

Every day, small and medium-sized enterprises encounter a convergence of challenges that can significantly hinder the financial health of their business.

Source: CFIB

Inflation
The biggest financial challenge for SMEs is, by far, inflation. Over the past few years, inflation has surged, significantly increasing the cost of goods and services for small and medium-sized companies. This trend has forced SMEs to grapple with a thorny, lose-lose pricing dilemma: increasing prices to offset rising operational costs may alienate price-sensitive consumers but maintaining competitive pricing to attract and retain customers may hurt the bottom line.

Supply chain disruptions
Supply chain disruptions are another major financial challenge for SMEs. While these disruptions may not impact profits immediately, they can lead to significant delays and increased costs for raw materials and finished goods over time. For SMEs, the impact is usually more severe than for larger corporations, which might have more resources or alternative supply chains to deal with this challenge.

Increasing costs of labour
The labour market adds another layer of obstacles for SMEs to overcome financially. With the rising demand for skilled workers, there has been a corresponding increase in the costs of labour. SMEs find themselves in a tight spot, competing for talent against larger companies that can offer more substantial salaries and comprehensive benefits packages. This competition can make maintaining a stable, skilled workforce very costly.

These converging challenges have dramatically hurt the financial health of SMEs across Canada. If you count your business as one of them, tackling these challenges will require you to take five actionable steps to combat rising costs and squeezed profit margins.

1. Make Strategic Cost Management a Competitive Advantage

Strategic cost management goes beyond simply cutting costs—it involves carefully spending every dollar you have to improve both the efficiency and effectiveness of your business.

In the quest to maintain a profitable operation, small and medium-sized enterprises (SMEs) can use strategic cost management to continually adapt their spending strategy to stay ahead of rising costs and the competition.

Find alternative suppliers
One effective strategic cost management strategy is to identify and partner with alternative suppliers. By exploring different suppliers for raw materials and services, SMEs can often find more competitive rates, which helps lower overall costs without compromising on quality.

Regularly assessing the market to see if there's a better deal can save substantial amounts of money over time.

Streamline the procurement process
Another key area where SMEs can achieve strategic cost savings is through streamlining their procurement process. By adopting centralized purchasing and bulk buying, businesses can leverage economies of scale.

This means getting better prices for buying in larger quantities and reducing the number of transactions, which can also decrease procurement process costs and delays.

Renegotiate supplier contracts regularly
Negotiating and regularly reviewing supplier contracts is crucial. Markets change, and a deal that was competitive a year ago might not be as favourable now.

By staying proactive and revisiting contracts regularly, SMEs can negotiate terms that are more aligned with current market conditions and their business needs. This not only helps in securing cost savings but also in maintaining flexibility in the supply chain.

Eliminate non-essential spending
Strategic cost management strategy also involves prudent cost rationalization, a meticulous assessment of every business expense you have to identify and non-essential spending.

This process requires a critical look at how every dollar is spent. Whether it’s cutting back on unused software subscriptions or reconsidering underused office spaces, rationalizing costs can free up funds for more critical areas of your business.

Implement energy-efficient practices
Implementing energy-efficient practices is a straightforward yet impactful strategy. Small changes like upgrading to LED lighting, investing in energy-efficient appliances or improving insulation can significantly reduce utility bills.

These energy-efficient practices not only contribute to direct cost savings but also help position the business as environmentally responsible, which can enhance your brand image and boost customer loyalty.

By incorporating these strategic cost management practices, SMEs can better navigate the pressures of an economically challenging environment, ensuring they not only survive but thrive— just by turning potential threats into opportunities for efficiency and growth.

2. Turn challenging times into opportunities for growth and innovation

In difficult economic times, finding ways to enhance revenue can be as crucial as cutting costs.

Before you do anything to boost your revenue, revise your pricing strategy to reflect current market conditions. This doesn’t always mean increasing prices—it could involve offering more flexibility or value to keep your current customers engaged and attract new ones.

Tap into new markets or e-commerce
Expanding into new markets or exploring e-commerce can significantly widen your customer base. By establishing an online presence, you can reach beyond your local area and tap into provincial or even national markets.

The shift to new markets or e-commerce not only increases your potential customer pool but also diversifies the revenue streams of your business, reducing your dependency on local economic conditions.

Develop new products or services
Developing new products or services that align with evolving consumer needs is another strategy to boost revenue. This requires keeping a finger on the pulse of market trends and customer preferences.

For instance, if there is a growing demand for sustainable products in your industry, introducing eco-friendly options could attract a new segment of environmentally conscious consumers.

Implement loyalty programs and special promotions
Implementing loyalty programs and special promotions can enhance customer retention and increase spending.

Rewarding customers for their loyalty encourages them to return and promotions such as discounts on future purchases, limited-time offers or exclusive access to new products can increase the frequency and amount of their spending.

Highlight the value and quality of what you offer
Tailoring your marketing strategy to emphasize the value and quality of your products or services can justify price changes and help maintain customer trust and satisfaction.

In times when price sensitivity is high, highlighting the superior quality, customer service or unique features of your products or services can convince customers of the value they are getting for their money, making them more willing to accept price increases.

3. Invest in Technology That Really Pays Off for SMEs
Adopting the latest technology helps increase profitability for SMEs. From operational efficiencies and expanded market reach to strategic decision-making, technology can empower you to operate more effectively, compete more robustly and grow more profitably in today's digital economy.

Source: Cubeler

Increase your efficiency and productivity
By leveraging the latest technology to increase efficiency and productivity, you can significantly boost your profits. Automated tools reduce the need for manual labour, lowering operational costs and increasing output.

With systems like CRMs automating data entry and management tasks, your employees can focus on higher-value activities that directly contribute to revenue growth, maximizing your profitability.

Improve your communication and collaboration
Improved communication and collaboration through technology directly impact profitability. With streamlined workflows and better coordination, you can complete projects faster with fewer errors, leading to cost savings and increased customer satisfaction.

Ultimately, a higher level of communication and collaboration not only can retain your existing customers but also attract new ones due to the enhanced service quality, driving up your sales and profit margins.

Access a larger pool of customers
Technology's ability to expand market reach is a critical profit booster for SMEs. By establishing an online presence and utilizing digital marketing, you can gain access to customers beyond your immediate geographic location.

This expansion into new markets can create additional revenue streams, increasing your overall sales and profits without the proportional rise in your physical infrastructure or local marketing expenses.

Gain cost savings and a competitive edge
The long-term cost savings from technology adoption are significant profit drivers for SMEs. By reducing recurring expenses such as inventory and operating costs, you can run your business on a lower operational budget, maintaining the same level of output.

Additionally, the competitive advantage gained from technology innovation can allow you to differentiate your products or services, potentially commanding premium prices and improving your profit margins.

Enhance data analytics and decision-making
The ability to collect and analyze comprehensive data sets allows SMEs to make strategic decisions that enhance profitability. Insightful data analysis can help you identify profitable customer segments, enhancing your products or services and eliminating wasteful practices.

By making data-driven decisions, you can allocate resources more effectively, target efforts more accurately and, ultimately, boost your bottom line.

4. Develop a smart financial management plan for your business

Effective financial management and planning are critical for the survival and growth of SMEs, especially in unpredictable economic times.

By developing a smart financial plan for your business, you can create a more stable and profitable environment for your business. This not only positions you for immediate operational success but also sets a foundation for the long-term financial health and growth of your business.

Conduct a detailed cost and profitability analysis
With a detailed cost and profitability analysis, you can pinpoint financial leaks that may be draining your business resources and identify profit centres that could be improved for greater returns.

This kind of analysis can help you reallocate resources more efficiently, ensuring that every dollar you spend contributes positively to the overall financial health of your business.

Create realistic financial forecasts and scenarios
Creating realistic financial forecasts and scenarios can allow you to anticipate your future financial needs and prepare for potential risks. With this proactive approach, you can adjust your business strategy in advance, safeguarding your company against possible financial strain.

For example, planning for a scenario where you lose a major customer or, worse, your industry goes into a tailspin, can help you understand how your business would (and could) cope financially.

Manage your cash flow carefully and effectively
The importance of managing cash flow cannot be overstated. A well-managed cash flow system ensures that you have enough liquidity to cover day-to-day operations and avoid issues that could lead to financial distress.

Effective cash flow management includes timely invoicing, prudent expense tracking and the strategic timing of payables and receivables to maintain a steady flow of cash throughout the business cycle.

Profit from government grants, low-interest loans and tax incentives
More than ever, SMEs should use every financial resource available to them to make ends meet—like government grants, low-interest loans and tax incentives.

These financial resources can provide you with critical support, reducing the cost of borrowing and offering relief in areas that might otherwise place a strain on the finances of your business.

5. Build a Resilient Business Culture Where Everyone Thrives

Building a resilient business culture can significantly enhance employee satisfaction and productivity, acting as the backbone of a thriving workplace. Here’s why:

Greater employee engagement and productivity

• When employees feel valued and supported, they are more engaged in the company’s success.
  
  
• Higher engagement leads to greater efficiency and lower operational costs.
  
  
• Engaged employees produce higher output and better work quality, boosting profitability.

Lower turnover rates (and costs)

• Clear communication ensures employees understand their roles, leading to less costly corrections.
  
  
• Team-building enhances cooperation and morale, crucial for maintaining motivation and productivity.
  
  
• Flexible work policies cater to personal needs, enhancing job satisfaction and reducing the financial impact of employee turnover.

Leadership's role

• Leaders who embody company values and show commitment to employee welfare inspire staff.
  
  
• This fosters an inclusive and supportive work environment, affecting all organizational aspects from operations to customer interactions.
  
  
• Strong leadership enhances customer satisfaction and loyalty, driving sales and profitability.

Comprehensive business impact

• A strong business culture reduces costs associated with high turnover and inefficiencies.
  
  
• A resilient workplace culture creates a stable and motivated workforce, optimizes operations and enhances customer relationships.
  
  
• Cultivating a positive workplace is key to long-term success and a competitive advantage in the marketplace.

In the long run, building a resilient business culture is not just about creating a pleasant workplace but is crucial for reducing business costs and increasing profits.

Source: Academy to Innovate HR (AIHR)

Move Toward Greater Stability and Profitability Now

Whether it's adopting new technology, revising your financial plan or cultivating a stronger company culture, each step you take is a move towards greater stability and profitability.

Keep in mind that you do not have to “go it” alone. Seek additional resources or professional advice to tailor these five proven hacks to your specific needs.

Whatever you decide to do, take action today to secure a prosperous future for your business, transforming the challenges of rising costs and squeezed profits into opportunities for growth and success.

Quick Takeaways

• Strategic cost management: Cut costs significantly by optimizing your procurement process, renegotiating supplier contracts and implementing energy-efficient practices.
  
  
• Adjust pricing and expand markets: Revise your pricing to match market demands and explore e-commerce to broaden customer reach.
  
  
• Invest in technology: Use automation and digital tools to enhance your productivity and expand your market access, improving your profitability.
  
  
• Enhance financial practices: Perform a detailed financial analysis, manage cash flow strategically and leverage financial resources, like grants, to bolster financial stability.
  
  
• Build a resilient culture: Foster a strong workplace culture to increase employee productivity, reduce turnover and improve customer relationships, boosting the overall profitability of your business.

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