Managing margin in a high-cost environment

When costs rise, businesses can be slow to pass them on, particularly where there is concern about how customers will respond to price increases. However, absorbing higher costs for too long quickly erodes margin. Owners need to know where margin is being made by product, customer and channel, and where it is being lost. Pricing decisions need to reflect today's cost base, not historic margins.

Cashflow pressures have eased over the past year, but firefighting is still the most common red flag, reported by one in four businesses. A rolling cashflow forecast gives management early sight of that pressure rather than surfacing the problem when cash is already tight. Debtor days, creditor terms and stock levels need the same regular attention, relatively small movements in any of them can absorb significant working capital.

The renewed appetite for growth shows almost eight in ten businesses intending to grow over the next 12 months and fewer are delaying investment because of uncertainty. That makes financial discipline more important. Investing in growth consumes cash before it generates cash. Before investing in equipment, launching a product or entering a new market, management needs to know what the investment will cost, how much additional working capital it will tie up, what margin it will earn and how long it will take to pay back. Detailed projections and budgets can assist business owners in making these decisions.

Launching new products or services is the leading growth opportunity identified this year, and almost a third of businesses see potential in new export markets. Both can create real value, but business owners need to ensure they are driving margin and not just revenue.

In a high-cost environment, profitable growth matters more than growth for its own sake.