During times of economic uncertainty, it can be difficult to maintain business profitability. With recent changes, many businesses are experiencing various cost fluctuations, as well as supply chain disruptions.
If you’re already experiencing or anticipating this, read through our top tips for maintaining business profitability in a changing economy.
Understanding the current economic landscape in the USA
There are currently multiple factors affecting the US economy, including inflation trends, interest rate changes, and supply chain disruptions. These are all impacting how businesses across the US are operating, increasing costs and, ultimately, revenue.
Inflation
Since inflation causes the costs of goods and services to rise, you might assume it would increase profits. Unfortunately, it usually decreases them instead. That’s because it also increases the cost of your raw materials and production costs, while also limiting the customers who can afford your product.
Interest rate
As the interest rates set by the Federal Reserve continue to increase, the purchasing power of consumers rapidly decreases. High interest rates make it more expensive to spend money, so many choose to save it and only spend on necessities instead.
Supply chain disruptions
Any disruption to a business’s supply chain can have a long-term impact on its revenue. On the surface, this could lead to increased costs and production delays. However, these issues quickly progress into customer dissatisfaction and lost sales. With this in mind, it’s not hard to see how it can negatively impact your earnings.
Cost management and operational efficiency
One key way to maintain profitability is to reduce your costs, without compromising quality. While this can be difficult, you might want to consider areas like energy consumption. Some energy providers may offer lower rates, or you could implement certain measures that actively reduce your usage.
Mitigating currency risks through foreign exchange hedging
If your business operates internationally, you might want to consider foreign exchange hedging as a form of mitigating risk. Since exchange rates can fluctuate wildly, especially during economic turbulence, foreign exchange hedging helps to stabilise costs and revenues. For this reason, it’s a vital tool whenever you have to deal with international suppliers or customers.
This clever financial strategy involves agreeing to pay or accept payment in a certain currency or at a certain rate. This essentially ‘locks in’ a specific price, leading to a predictable and consistent cash flow, rather than allowing fluctuating rates, which could create high profits in one month, followed by significant losses.
Diversifying revenue streams and markets
In order to keep your business protected, we recommend having multiple revenue streams and operating across several different markets. While this may increase operational difficulties in the short-term, diversification also reduces dependence on a single source of revenue. In other words, if a national issue influences that market, your business is better equipped to overcome the impact.
Many large, successful businesses operate across wildly different markets, specifically for this reason. For example, Nestle offer various food and drinks, including soda, cereals, candy, coffee, and pet foods.