Small and midsize businesses (SMBs) have always faced challenges, but in today’s volatile economy, it can feel like the challenges are compounding.
Take inflation. While the consumer price index, a key inflation gauge, has declined from its peak in 2022, business costs remain high. And supply chain disruptions, fueled by everything from raw materials shortages to geopolitical tensions—and now tariffs—are becoming a constant factor for SMBs.
But even during these times of rising costs and supply chain disruption, you have options. You can take corrective actions and plan ahead to ensure you can weather any number of scenarios.
Supply Chain Disruption: The New Normal
The pandemic sent a massive shockwave through the global supply chain, and its ripples are still being felt today. Ongoing political volatility, new and shifting tariffs, and rising shipping costs have made supply chain disruptions more frequent, to the point where they are now part of the business landscape. It’s important to recognize this shift, to assume supply chain instability and plan for it.
Supply chain disruptions can be particularly hard for small businesses to navigate, as they can impact your cash flow.
“It’s going to put, in some cases, a strain on cash flow, because you’re paying more for cost of goods sold,” says CFO Ken R.
Here, Ken shares his top strategies for supply chain management.
Get Ahead With Supply Chain Planning
Establish Strong Supplier Relationships
Strong supplier relationships are essential for SMB success: they allow you to deliver higher-quality products, save money, solve problems faster and take advantage of opportunities to innovate.
In the case of tariffs, strong relationships with suppliers can help SMBs renegotiate contracts to mitigate the increase.
Here are some strategies to build strong supplier relationships:
- Look for opportunities to align your goals with your supplier’s goals. For example, if demand for your products exceeds your supplier’s ability to deliver critical components, consider committing to a consistent minimum order that would allow your supplier to expand production.
- Lean into your most impactful suppliers—those that reliably deliver the high-quality products your business depends on.
- Build trust by communicating regularly and openly. Your suppliers will face many of the same pressures as you. Open dialogue will help you find solutions together.
When assessing your supply chain, ensure you have multiple sources for acquiring critical components for your products. As Ken points out, just as having all of your revenue come from one or two customers is a risk, the same is true for the supply chain.
“Diversifying both your revenue streams and your supply chain is going to help you through tough times,” says Ken. “You should never be allowing yourself to be beholden to one or two key suppliers.”
Work Toward Inventory Optimization
Consider transitioning from a “just in time” to a “just in case” approach to inventory management.
- With the “just in time” approach, you receive goods right before they’re needed for production or sale, minimizing the inventory levels you have on hand at any given moment.
- With the “just in case” approach, you maintain slightly higher inventory levels to protect your business against supply chain disruptions.
If you’re contemplating a switch, be cautious with the change and make sure you don’t tie up too much capital in inventory.
“This is where a lot of small business companies can go awry because cash flow is king,” says Ken. Determine exactly when and how much inventory to stockpile to keep your business operations moving.
Focus On What Sells
Track the performance of your products with data analysis and product management tools. Using sales and revenue data to monitor fluctuations over time or the performance of specific products by region makes it easier to adapt quickly when the market changes.
“A lot of times some products are taking off and they’re selling a lot. And others don’t do that well,” says Ken. “In supply chains, continuously evaluate that. If you’ve got products that aren’t selling, reevaluate that. Concentrate on where you’re making money.”
Control Your Expenses
Manage your operating expenses such as wages, infrastructure costs (office or warehouse space), services and inventory costs. For example, if you’re contemplating increasing your inventory, don’t forget to account for higher storage and handling costs. Consider using freelancers or contractors for specialized services that aren’t part of your core business rather than adding full-time staff.
Although monitoring and adjusting your expenses should be routine, it’s a crucial exercise for supply chain planning. “Constantly evaluate your expenses. Cut where you need to,” says Ken.
Strategies for Inflation Planning
Businesses can mitigate the impact of inflation the same way they approach everyday business planning: have good, solid plans for both great times and bad times. Here are the key areas to focus on.
Strengthen Your Cash Flow
Liquidity is essential for SMBs. Strong cash flow management is vital to carry your business through a volatile economy. As business costs rise, you need to ensure you have enough cash to cover your expenses.
“The general rule is, as a CFO, I want at least three to six months in cash to cover my essential operating expenses,” says Ken.
Here are some strategies for maintaining liquidity:
- Maintain control of your inventory. Even if you’re implementing a “just in case” inventory approach, it’s important not to tie up too much cash that you could be using elsewhere.
- Perform regular cash flow analysis. Monitoring inflows and outflows of cash can alert you to issues before they become problems. Align incoming and outgoing payments tied to the same project. Aim to issue vendor payments as close as possible to when you collect from customers for the same work.
- Monitor accounts receivable. Encourage faster payments by tightening your invoicing process. Send invoices immediately after work is completed, offer small discounts for early payment, and follow up promptly on overdue accounts.
Monitor Your Days Sales Outstanding to Shore Up Cash
Manage your accounts receivable (AR) by monitoring your days sales outstanding (DSO) metric, which gives you insight into the average time it takes your company to receive payment for sales.
To calculate DSO, divide the average AR for a given period by the total value of credit sales for the same period, then multiply the result by the number of days in the period.
DSO = (AR / total credit sales) x # of days
A high DSO indicates a substantial delay before your company receives payment. A low DSO means your company gets paid promptly.
To decrease DSO, follow up with late-paying customers immediately. Ken suggests offering early payment incentives to get the cash in quicker. For example, you could offer a 2% reduction if payment is received in 15 days rather than 30.
Negotiate With Vendors and Suppliers
Negotiating with vendors and suppliers has benefits beyond getting a better price: it also sets the stage for building strong, mutually beneficial relationships that can strengthen your business in tough times. And while your vendors and suppliers will also be feeling the effects of inflation and supply chain disruption, it’s important to remember that they depend on your business just as much as you depend on them.
Ken recommends working with your suppliers to find strategies that benefit both parties.
“See if you can co-invest into some cost-saving strategies like bulk shipping or consolidating orders. Figure out ways to kind of share the risk to lower prices and keep things moving through,” says Ken.
Review Your Pricing Strategy
Given the reality of supply chain disruptions and newly imposed tariffs, companies may need to raise prices to cover the increased costs of inputs while protecting cash flow and margins.
“You have to think about increasing prices during inflation.” says Ken. “I tell my clients, just be transparent. Everybody appreciates when you’re transparent. Have open conversations with your customer and say, look, I really don’t want to increase my price, but I don’t have any other choice.”
Reviewing your pricing strategy doesn’t always mean price increases. Ultimately, it’s about protecting your liquidity. Some other options include:
- Applying tariff-related surcharges to affected products
- Offering volume or bundling discounts
- Adjusting pricing based on regional demand
- Running rebates or incentives to move products that aren’t selling as quickly
Stay Agile With Smart Financing Options
Cash is king for SMBs, and your business will need a cushion to get through economic disruptions, including supply chain disruptions and rising costs.
Secure a Business Line of Credit
“It’s imperative you have a business line of credit,” says Ken. “You have got to have some sort of cushion to get through some tough times.”
Make sure you have access to this capital before you need it. “Getting a business line of credit in a best case scenario is probably 60 days,” says Ken. “And so you don’t want to wait until you need it. You want to have it in place.”
Consider Invoice Factoring In a Pinch
Another option is to take advantage of invoice factoring opportunities. With invoice factoring, a third party buys your receivables at a discount and then does the work of collecting the cash. For example, a business with $1M in AR can sell it for $900K, and the third party takes the risk to collect the remainder.
Ken notes this should not be your first choice, but says invoice factoring can be an effective tool in tough times. “It does work as a short-term solution,” he says.
Bring CFO Guidance to Your Business
A CFO helps your SMB plan, model and adapt to changing economic circumstances. For SMBs looking to grow or even to thrive in pressing times, a fractional CFO is a cost-effective way to get experienced support with all of the strategies you need to manage supply chains and inflation, including cash flow projections, scenario planning and more.
Paro matches your company with experienced, vetted, fractional CFOs ready to support your team through any economic headwinds you may face. Learn more about the services our fractional CFOs provide and the decades of experience they can bring to your company.
