As the economy is starting to recover from the pandemic, many businesses are facing the following problems:
- Different profit margins for similar jobs
- Cash flow challenges due to seasonality
- Difficulty pricing jobs
- Increased costs for financing customers
- Inconsistent prices for materials and subcontractors
- Challenges with industry and regional inflation
As the economy picks up, businesses have an increased concern for inflation. The US government has offered stimulus money, the Paycheck Protection Program (PPP), and EIDL (Economic Impact Disaster Loans), as well as low interest rates in an effort to bolster the economy. So far, we have not seen across-the-board inflation that is higher than expected. The Federal Reserve has a 2% inflation target, so some inflation is considered normal.
As businesses reopen and there is pent-up demand for supplies, there could be some temporary inflation. This is expected to settle down quickly. Supply chain misalignments and disruptions can temporarily affect inflation as supply has been affected for certain industries. This problem should resolve as the different industries all get back to normal operations. If you want to read more on this topic, check out this article, "Pandemic Prices: Assessment Inflation in the Months and Years Ahead.”
How will your business survive the industry-specific swings in prices?
The construction industry, for example, is experiencing significant price increases. According to the AGC (Associations of General Contractors), inflation is having a significant impact on this sector of the economy. Construction costs have increased nearly 13% from April 2020 to February 2021. These figures are rapidly becoming understated as fuel continues to increase more recently, and there have been delays in production and shipment of materials. Some raw materials have increased in price more recently including lumber (62%) and steel (20%). For more information on this topic see the Construction Inflation Report.
As you can see, you could have notable inflation in one industry even if general inflation is not going up significantly. As our economy looks to the future, all businesses need to stay ahead of inflation in order to maintain their profit margin.
How Can You Stay Ahead of inflation?
The first step to maintaining your profit margin is good job costing. Job costing is the detailed accounting of all of the costs of materials, labor, and overhead for each specific job. The companies with good accounting processes and costing reporting will withstand inflation the best.
Here are three important steps you can take to stay ahead:
- Have a consistent approach for entering costs by client/job in order to run accurate reports. Any cost that hits COGS should be costed to a job. If you cannot do this, you have to allocate these costs consistently.
- All financials should be completed by the 15th of the following month in order to record current numbers. It is so much easier to be current than to try to do the accounting at a later date. It is tough to go back into the prior year and recode costs to a customer. Most of the time, nobody remembers, and it is a guess.
- Review the accounting reports consistently in order to assess the lowest-margin customers. When this information is reviewed regularly, trends become apparent, and it becomes easier to control the profit margins.
Once you have a good report that you are reviewing, what do you do with the information?
Next week we will discuss other steps that you can take to improve your margins amid inflation.
If you have any questions about how to manage your profit margins during the post-pandemic economic recovery, contact BenderCFO. We’re always ready to help.