In light of the sharp increase we’ve recently seen in the price of oil and gas, it is important to understand how these increases affect your profits and your cash flow. We see the cost of fuel rising when we pull into the gas station to fill up our own cars and we are painfully aware that an increasing portion of our personal cash flow is earmarked for this expense. As business owners, we need to be attentive and intentional in the way we respond to rising gas prices with regard to our overall cash management strategies for our businesses.
Every Business is Impacted by Higher Gas Prices
Every order of goods and supplies your business receives is affected by higher gas prices. If you are a service business, such as an accountant, attorney, or insurance broker, expenses may increase slowly over time. If you are not paying attention, the higher cost of supplies may not be noticed until you review your cash flow and question the increase in costs relative to the same time the previous year.
If you own a business that relies on a lot of travel, either driving for meetings and deliveries, or flying several times a month to meet with clients in different cities, this increase will be much more obvious. Pizza deliveries and plumbers are prime examples of the types of businesses that will immediately identify the source of strain on their cash flow. The rising cost of fuel is directly felt and shows up on their bottom line. Business owners who travel by airline regularly may not discover the source of their cash crunch as readily, but rest assured, in an environment where 35% of an airline’s total expenses are fuel costs, you can bet that they are looking to pass the expense along to you!
The impact of rising gas prices on businesses is astonishingly far-reaching. Consider the example of a florist. The florist must purchase fresh flowers for arrangements, and subsequently deliver those arrangements to customers. The florist finds that the cost of fresh flowers has increased. The nursery that the florist deals with explains that this is due to the higher cost of fertilizers (which are made with petroleum products), in addition to the rising cost of the fuel used to deliver the flowers to the florist. The florist has already paid more for their flowers, but they must also spend more on the fuel used in delivering finished arrangements to their customers. There is an endless list of examples like this, which illustrate the ripple effect of rising gas prices that is felt in every step of the distribution process.
Your Cash Flow Projection Will Help You Identify a Cash Crunch Before it Becomes a Crisis
When a business owner is not aware of how the higher cost of fuel affects their business, they can quickly discover that the prices they are charging have minimized their profit margin to the point that they are in a crisis. By monitoring your costs (using your Cash Flow Projection) at a minimum of a monthly basis, you have the information you need to make corrections as needed.
These corrections may include raising prices of products and/or adding a surcharge to deliveries. However, many businesses have already cut their profit margin just to compete in today’s market and raising prices may make it difficult to remain competitive. In that case, business owners must focus on their expenses. It can be difficult to determine where a business can cut costs without jeopardizing quality. (An excellent book on the subject of cutting costs without compromising on quality is Eric Ries’ New York Times Bestseller, “The Lean Startup.” Don’t be misled by the title, Ries’ principles can be applied to established businesses as well. )
When evaluating my own business, I found that I was able to reduce expenses and save time by tapping into several online services. For example, Stamps.com is a service that saves me from having to visit the post office; I can print my own postage in the appropriate amount without leaving my desk. Eliminating a middle-man is always nice and Uprinting.com and Wix.com have both helped me do that. I’ve used Uprinting for postcards and business cards and Wix to set up a flash-based website with very little effort. (Both sites have easy to use templates that can eliminate the need for a graphic designer/web developer for simple projects.) I keep an updated list of resources that I’ve found helpful to my business on this site and I encourage you to take a look: Smart Business Cash Flow Additional Resources Page.
Use Your Cash Flow Projection to Inform your Decisions About Future Business Activities
In circumstances where cutting expenses does not provide sufficient relief, a business owner may have to be willing to take a serious look at his or her business plan and consider making radical changes to what products and services are offered and/or reconsider how the business can better differentiate itself from competitors.
The rising cost of fuel impacts every business in some way and I’d love to hear how you’ve been managing this challenge in your business. Have you raised your prices or lowered your expenses – or have you found something else that works for you? I encourage you to leave your feedback in the comments section below.
No matter what your approach has been, I hope this post has helped to illustrate the importance of paying close attention to your Cash Flow Projection. A business owner cannot begin to address the myriad of issues associated with rising fuel costs until he or she recognizes that the issue exists. If you haven’t started your Cash Flow Projection yet – I’m glad you’re still reading! Take advantage of my free Cash Flow Template (Microsoft Excel) and take a moment to read my post which explains “The Importance of Cash Flow.” When you’re ready to get started setting your Cash Flow up, Smart Business Cash Flow provides step-by-step instructions for doing so, starting with my post, “Cash Flow Projection and the Shortcomings of Total Reliance on the Profit and Loss Statement.”
Great read! Very insightful and helpful to managing one’s business affairs and personal budget as well.