Manufacturing firms need strategies to handle cost blowouts and an understanding of how to develop a pricing policy that helps deal with inflation
A changing geopolitical climate and a drive to build onshore capabilities make it the most promising era for Australian manufacturing in some time, however the sector is still vulnerable to the impact of inflation.
As Australia grapples with inflation and interest rates at their highest point in over a decade, the sharp increase in resources costs, along with skills shortages, are having an effect. Many manufacturing businesses are also dealing with cashflow concerns as customer payments push well beyond standard 30-day terms.
RSM Australia’s national manufacturing lead Jessica Olivier said it’s not easy to balance periods of increased demand with cashflow – let alone when you’re operating in a volatile economy where your own customers may be struggling to pay you and interest rate rises are increasing the cost of capital.
“The ATO’s Research and Development tax incentive can give relief to manufacturers. This has been in place for many years but was given a recent boost and now provides greater benefits for businesses of all sizes which has attracted many more manufacturing firms to the program to inject new capital into their business,” Ms Olivier said.
Small companies under financial pressure appreciate the ability to potentially finance R&D tax refunds in real time (as R&D monies are spent). This allows the business to access funds immediately and direct the ATO’s payment to the financier once the claim has been processed after financial year end. Although not as speedy a process as an R&D tax claim, government grants are another popular avenue of alternate funding.
Four key inflation strategies for manufacturing
RSM Australia has released a report thinkBIG:SME survival guide to inflation and interest rate rises which includes four tips for the manufacturing sector:
- Take advantage of grants and incentives: this can provide the cashflow and capital to support growth and deliver on new projects. Consultants with expertise in R&D and government and non-government grants can help you find every avenue of funding available to your business.
- Invest in your finance function: Now’s the time to base your decision making on accurate, reliable financial information. This may require updating systems (such as moving from basic accounting software to an ERP platform), and re-organising processes to ensure you’re capturing all available data.
- Be cyber aware: The increased risk of cyber-attacks is across all sectors and the cost and impact on smaller businesses tends to be disproportionately higher. To mitigate financial and reputational risk, conduct a full review of your cybersecurity measures and take immediate steps to plug any gaps. Invest in upgrading systems and upskilling staff to stay a step ahead of new threats as they emerge.
- Maximise automation: There are many ways manufacturing companies can take advantage of automation – be it within production, procurement, sales or administrative areas – to be more efficient and lower the cost of product and service delivery.
How to develop a pricing strategy to deal with inflation
Holding off on price increases does no favours if you ultimately have to close your business because you could not afford to continue. You need to make effective decisions about what to change and when, and how to properly communicate these changes to your customers.
With this in mind, here are 5 steps to help you develop a pricing strategy:
Step 1: Know what it costs to deliver every product and service
Knowing your numbers is crucial during times of increased financial pressure. Take time to determine how much you are paying for all your key cost centres: your premises, utilities, staff, supplies, technology, shipping, fuel, insurance, debt and any others specific to your business. Try to account for absolutely everything it takes to keep your business operational.
Step 2: Be realistic and pass on costs wherever possible
Not passing on the higher costs you are now paying to operate will eventually compromise business viability. You should be making the same margin (or close to it) that you were making prior to inflation and interest rate rises. Evaluate current costs against current pricing, to determine a fair and accurate percentage increase that will keep your business in line with inflation. Don’t sell yourself short, as you need to account for rises that could occur in the short to mid-term.
Step 3: Communicate with customers
Don’t be afraid to engage with customers. Explain you are experiencing increased costs, and need to pass them on to protect your business. You could do this with signs in your premise, an email, or your normal method of talking to your customer base. Ideally, start this before you roll out the new pricing, so they are prepared and less likely to feel offence or frustration when they next buy from you.
Step 4: Review regularly
In times of rapid change, it’s not enough to revisit your pricing strategy every 1-3 years. Instead, plan to sit down every 3-6 months to run the numbers again.
Sometimes, prices can remain the same. Other times, they will need to increase slightly. Of course, you may also find that costs decrease over time and you can use this leeway to run more promotions or offer deals to loyal customers. Again, maintain communication with your customers and let them know what is changing (or not changing) and why.
Step 5: Have a plan to deal with debt
Companies with minimal debt are best positioned to deal with periods of inflation. They can take advantage of the strong economic growth and accelerate their own expansion by exploring potential acquisitions.
If your business is highly leveraged (lots of debt), you need a plan to manage it. Find a trusted business adviser who can help you assess how your debt is currently managed, your financial position to pay it down, the possibility of debt consolidation and potentially lower cost avenues of funding.
If the situation requires, they will also be able to assist with assessing the viability of a merger or acquisition, if that is the best solution for your business moving forward.
Jessica Olivier is partner, R&D Tax and Government Incentives, and national leader – Manufacturing Services at professional services firm RSM Austraila.
