How much can I raise prices or rates due to inflation?
Supply shortages have raised the prices of supplies sky-high. Small businesses faced with the challenge of paying more for supplies are in a bind. While it is a good idea to keep profit as steady as possible, the thought of driving away your existing customer base by raising prices on your products might seem daunting. But there may be a way to find a balance and keep both your small business and your customers in the green.
One potential starting point to consider is reviewing the most recent costs of your materials and of your services. Looking at these factors, you might be able to figure out new options for prices based on what you need to bring in to keep profit margins high enough to sustain your business without losing customers.
It may seem impossible to raise your prices enough to keep your small business's profit margins steady. If so, step rate increases are one possible way to gradually adjust your clients to the shift. Small increases in end product costs to consumers over time might go a long way to reduce sticker shock.
To bolster profits during the transition period, you might consider adding new products or services to your current offerings. Doing so could boost income in the short term, and attract a new customer base in the long run.
How can I cut costs without affecting quality?
For many small businesses, raising prices high enough to keep profit margins the same may not be an option. For these small businesses, consider cutting costs, at least for a while. Cutting costs without affecting quality can be difficult for small businesses.
A first step to consider is which costs you might lower. If your small business makes products, you may not be able to control the cost of supplies you receive from your vendors. If you run a local grocery or retail store, you are likely aware that the price of your stock is set by wholesalers and most likely cannot be changed. To reduce costs while making end products that are just as good, small businesses might consider thinking outside the shipping box, such as becoming their own supplier or shopping around for less expensive suppliers.
You might try buying in larger amounts where possible to reduce the overall cost of supplies. You may be able to rework deals with certain vendors. Small businesses may also be able to lower costs during production by cutting energy and electricity usage. Lastly, if reducing your workforce is an option, you may be able to hire someone else, at a lower rate, to perform certain tasks.
How do I decide which service contracts to rework, end, or renew?
Which service contracts you might consider ending and which you might renew may not be a question your small business has had to answer until now. It can help to take a careful look at how many times you used a given service in the last fiscal year. If you used the service only once or twice, calculate the cost of the service. If you find the cost of the visits without a contract would have been higher than the total cost of the contract, this may be a contract to renew. Or, if you suspect a piece of equipment is nearing the end of its useful life, but still has some time left, you might renew your service contract on that equipment.
When deciding which service contracts to end, you might factor in the reliability, newness, and quality of the equipment or item to be serviced. You may be able to find repair statistics on that piece of equipment online or by contacting the original manufacturer. If everything has been in great working condition, is still under the original manufacturer's warranty, or is unlikely to need repairs, you may be able to cut costs by ending or pausing a Maintenance Contract.
Reworking contracts that you simply cannot let go of might be an option for small business owners. Before you talk to the service company, it is a good idea to have some details on hand about your service history. For example, how many service visits did you require last year, and how many might you expect this year? If the expected number is low, consider bringing up this fact to your provider. Another tactic to consider for lowering the price of your service contract is to look at the scope and terms of the contract again. If the contract offers more than what you require, consider offering to cut services in exchange for a lower overall price.
Can I try to change the terms of my lease mid-contract?
For many small businesses, Commercial Lease Agreements can be rather costly. Reworking the terms of your lease may be an option if you are nearing the renewal period. But, if you are firmly mid-contract, you may still try to negotiate with your landlord.
When doing this, it's a good idea to consider what your landlord may want from the deal. For example, in exchange for a lower rate, you may want to offer to extend your lease, which could provide stability for both you and your landlord. If you do not need the full space available to you, perhaps your landlord has a smaller space, or can modify your space so they may rent out the space you are not using. This might help you downsize while at the same time providing your landlord the benefit of attracting a new tenant to increase their overall revenue.
When is it a good time to think about getting a smaller office?
Many small businesses have chosen to use smaller office spaces in the wake of the COVID-19 pandemic. Letting more employees work from home might attract and retain talent in a tough job market. It might also save you money on your lease payments.
If your employees need or want to work in person, you might shift toward a smaller space that is better for coworking. Coworking reduces the need for each person to have an office or cubicle. It could inspire workers and even entire departments to work together, too.
If you need to move to a smaller or cheaper physical space, consider reading your lease carefully to see if there is a subletting rule. In a Sublease Agreement, a subtenant pays you the rent for your current space, which you in turn pay to your landlord. This might free up your cash to go toward a new, less costly lease for your business. You will likely remain responsible for your old lease, so choosing a subtenant you can trust is key. If your landlord allows, and you can find another business to take over your lease, you may be able to sign a Lease Assignment that transfers your lease to a new tenant.
How can I avoid employee layoffs?
Small businesses owners often have great, even personal, relationships with their employees. If you have attracted great talent, keeping your team members around might be a priority. To avoid layoffs, it might be a good idea to get creative and come up with ideas that might resonate well with your workers.
Younger employees, for example, often welcome vacation time. If you are already offering two weeks of paid vacation, you might raise it to four weeks of vacation, two of which remain paid. If your employees see this as a perk, you may have saved two weeks of payroll from your budget. Employees may also want to move toward a four-day workweek, which could lower payroll costs substantially.
Sometimes you cannot avoid a slow downturn of the business or the need to reduce your workforce. While there are several ways to make the cuts, the choice that makes sense for your business may be unique to you. If your business has been around for a while and has kept some loyal employees, you might keep your most experienced staff with you. Newer businesses might try keeping those with the most merit or skills. If you gather metrics on employee performance, you may be able to see which employees produce or save the most money for your company.
To learn more about how to protect your small business during tough economic times, reach out to a Rocket Lawyer network attorney for affordable legal advice, or download the Rocket Lawyer Mobile App.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.