Mastering Operating Expenses: A Key to Business Success in Trying Times
The past couple of years have seen businesses around the world grappling with unprecedented challenges. In New Zealand, the journey of recovery from the economic shocks of the COVID-19 pandemic has been marked with inflation, rising fuel and transport costs, and supply chain disruptions. Businesses have had to adapt swiftly to these changes, and the journey hasn’t been easy. Amidst this turmoil, maintaining a clear understanding and control of operating expenses has emerged as a vital aspect of business survival and growth.
The Impact of Rising Wages on Business Revenue and Pricing
The business environment today is marked by several cost pressures. Inflation, triggered by a surge in government borrowing to counter the effects of the pandemic, is one of them. Another significant factor is the rise in wages, with the New Zealand Living Wage rate increasing by 9.9% in September this year. This rise may seem innocuous, especially for businesses not employing people at the minimum wage. However, it is essential to consider the ripple effect it can have on those earning close to or just above the living wage.
Take, for instance, a business with an annual revenue of around $2.6 million. A 9.9% rise in labour costs, for this business, would necessitate an increase in revenue by $236,000 per year or an increase in prices by 5.3% to accommodate the wage hike. And this is just one cost element. There are other operating expenses like supply chain costs, overheads, and others which also creep in gradually, often going unnoticed until they make a substantial dent in the bottom line.
Many business owners tend to overlook these creeping costs and end up dealing with the fallout when the accumulated financial strain becomes too significant to ignore. He emphasises the need for business owners to adopt a proactive approach, regularly analysing the business’s economic environment, costs, expenses, and their potential impacts. This requires time to work on the business and a focus on the numbers that count.
The line chart represents the potential loss of a business over a 12-month period, starting from September 2023 to September 2024.
Decoding Operating Expenses – Eastwood & Co’s Approach to Enhancing Financial Health and Business Resilience
Operating expenses often get lumped together, and this can obscure the individual impacts of each component. Breaking them down helps you understand the true cost of labour, materials, and other elements. With a better understanding, you’re better able to manage your business’s financial health. Visualising and understanding the ‘real’ costs can help business owners prevent the avoidable pitfall of burying their heads in the sand because the task seems too daunting.
Eastwood & Co’s approach to helping businesses thrive involves providing detailed, relevant reports to their clients. They advocate for monitoring performance trends over ‘rolling’ periods, like the past three or twelve months. This method offers a more accurate representation of the business’s health. It also helps to spot negative trends early on, allowing for quicker corrective action.
When a downward trend is spotted, it’s crucial to act swiftly. Ensure that your margins are in place, and you have a contingency plan. Eastwood & Co advises businesses to maintain a couple of months’ backstop in their accounts to deal with unexpected challenges. These could range from client issues to staffing problems or supply chain disruptions. All these issues can simultaneously occur, causing significant financial strain.
Navigating Financial Uncertainty with Eastwood & Co
Now more than ever, it’s important for business owners to keep their finger on the pulse. Eastwood & Co’s mission is to help businesses navigate these moments with accurate forecasting and strategic planning.
We understand that one of the significant fears many business owners have is losing customers due to price increases. That’s where we come in, helping you strike a balance between maintaining competitiveness and ensuring profitability.
If the challenges of managing your operating expenses resonate with you, we invite you to contact Eastwood & Co today. Let us work together to build a more sustainable, resilient, and profitable business amidst these challenging times. Contact us today for a free initial coaching session and take the first step towards mastering your operating expenses. We genuinely care about your success, and we’re here to help you achieve it.