According to the U.S. Bureau of Labor Statistics (BLS), the Producer Price Index (PPI) or the increase in prices, goods and services that producers experienced for their input costs, saw a substantial rise, according to its latest report issued on Dec. 14.
For November 2021, the PPI grew by 0.8 percent. For the past year ending in November 2021, it rose by 9.6 percent on an annualized basis. According to the BLS, this is the hottest PPI reading since this metric originated in November 2010. With costs not appearing to abate anytime soon, how can businesses combat rising costs?
Figure out Financial Priorities
Harvard Business Review (HBR) details steps that companies can take to evaluate and make adjustments to mitigate the rising cost of inflation. The first decision is to determine “high-resolution spending visibility,” which means a fully transparent documentation of how much money is spent, in what way it’s spent and how effective such spending is in the organization.
When it comes to effectively deploying capital, HBR recommends reducing expenses and/or investing capital to grow and maintain a businesses’ market edge. If there’s a unique customer experience that would suffer, that might not be the right area to cut. However, HBR cites an energy business that conducted an audit of its operations and determined a savings of $10 million was possible if it temporarily suspended 80 business operation expenses.
Analyze Past Spending for Future Efficiency
After a business understands spending patterns and how they impact profitability, this can be analyzed to see how to work around inflation. HBR gives the example of how “external groups” beyond the decision makers on new build projects cost certain companies more than $400 million and six months of time. By using “cross-functional collaboration,” costs that could be cut or work that could be done differently gave the company a way to realize greater efficiency.
Reduce Choices for Consumers
As the competition among employers to find and retain workers is tough, including the pressure to raise wages, simplifying what a company offers can help reduce costs.
Mondelez International, a global producer of comestibles, reduced the number of products it offered to customers by 25 percent when the COVID-19 pandemic started. Similarly, hotels began reducing the need for housekeeping by asking guests, especially during the pandemic, if they needed their rooms freshened up during stays.
Selectively Digitize Tasks
When it comes to businesses fighting for their survival, one silver lining of the pandemic is automation. Many companies discovered the benefits of automation, including higher profits, gains in output, etc.
HBR explains that processes on data for products, such as weight, size, images, etc., can be automated, freeing up human workers for higher level tasks, such as analysis and projections. Citing the example of David’s Bridal, through its Zoey messaging concierge service during the beginning of 2020, appointment and communication center expenses fell by 30 percent. This helped shift human workers to devote more time to in-person assistance.
While there’s no magic recipe to combat inflation, by analyzing a company’s books and keeping up with trends, there are many ways to affect cost savings.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals.
Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice.
Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result.
The NSAD has not reviewed any of the Service2Client LLC content.
Readers are encouraged to contact their CPA regarding the topics in these articles.