COAST RIVER BUSINESS JOURNAL
BUSINESS COMMENT
JULy 2021 • 13
Watching the bottom line
Small business owners must watch for the high price of inflation
By Jessica Newhall
Clatsop Community College
Small Business Development Center
There is a lot of talk today about infla-
tion and what impact rising rates could have
on the economy. For some, inflation may seem
like something not to be overly concerned
about. After all, what control does one individ-
ual have over large-scale or general economic
factors? However, if you are a small business
owner, inflation is something you need to be
watching very carefully and planning around
as it can have a very real and negative impact
on your business’s cash flow, agility and most
importantly, profitability.
To start, let us unpack what inflation is.
Inflation is the increase in price level of goods
and services over a specified time and is often
expressed as a rate. For example, if something
cost $1 last year and is now $1.05 this year,
the inflation rate for that product would be pre-
sented as 5%. For consumers and businesses,
when inflation occurs, the money in their bank
account does not buy as much as it used to
and as a result, you are faced with purchasing
less in quantity or spending more for the same
amount.
Last month, the Bureau of Labor Statistics
reported the biggest surge in inflation in 13
years. Consumer prices rose 5% between May
2020 and May 2021 with some of the key index
areas seeing major spikes including gas prices
(up 52%), airline tickets (up 24%), hotel rooms
(up 7%), and clothing (up 3%). In addition, the
supply chain for goods has also been severely
impacted by the pandemic, ice storms, raw
materials shortages and supply route issues —
all of which have contributed generally to cost
increases for small business owners. Combine
the rising supply chain costs with labor short-
ages, a particular issue here in our region, and
suddenly, a small business owner could start to
feel their finances getting seriously squeezed.
While economists generally do not pre-
dict we will see inflation rates like the 1970s
where inflation rates averaged 7.1% and inter-
est rates rose to almost 20%, there is still rea-
son for small business owners to be keeping a
close eye on this. Some of the challenges that
will likely become a reality are: having less
“wiggle room” should financial missteps hap-
pen, increased inventory costs mean you have
less on hand to sell, cash flow becomes tight as
accounts receivable become slower to get paid,
or employee wage demands exceed what you
Jessica Newhall
can afford to pay.
If any of this sounds familiar or you are
just generally wanting to make sure that you
are prepared, you can start by ensuring you are
looking at the right financial indicators for your
business. One of the most dangerous business
management strategies an owner can employ
with, you should be analyzing your key finan-
cial statements at the end of every month, start-
ing with your profit and loss statement, which
can give you two key indicators: gross profit
margin and net income margin.
Gross profit is the money a company earns
after subtracting the cost of producing and
selling its products, or cost of goods. When
expressed as a percentage this becomes the
gross profit margin (calculated as total reve-
nue minus total cost of goods sold divided by
total revenue). When looked at as a compar-
ison monthly it can illustrate how effectively
you are generating revenue from each dollar
of cost. For example, if you had a gross mar-
gin in April 2021 of 33% but you saw that go
down to 30% in May and then to 28% in June,
this might start to indicate that you have some
cost increases happening in your supply chain
or production labor that you are not account-
ing for in your product or service pricing strat-
egy and you may need to make some immedi-
ate adjustments.
The next indicator to look at is net income,
or the company’s profit after all its expenses
have been deducted from revenues — often
referred to as “the bottom line” due to its posi-
tion at the bottom of the profit and loss state-
ment. When expressed as a percentage this is
referred to as the net profit margin and is calcu-
‘SO, WHAT SHOULD yOU BE LOOKING AT?
TO START WITH, yOU SHOULD BE ANALyZ-
ING yOUR KEy FINANCIAL STATEMENTS AT
THE END OF EVERy MONTH, STARTING WITH
yOUR PROFIT AND LOSS STATEMENT, WHICH
CAN GIVE yOU TWO KEy INDICATORS: GROSS
PROFIT MARGIN AND NET INCOME MARGIN.’
is relying solely on sales data (such as point
of sale reports) or revenue reports to be their
financial indicator for the health of their busi-
ness. Especially right now, when most busi-
nesses are enjoying the post-pandemic, high
season rush of business, these reports could be
telling a false tale of what is happening below
the surface where cost of goods, labor and other
expense increases could be eating into margins
and ultimately profitability.
So, what should you be looking at? To start
lated by dividing net income by revenue. This
percentage, when analyzed over time, is one
of the most important indicators for how well
your business is doing overall as it tells you
whether you are generating enough revenue
from your sales to cover the cost of your prod-
ucts and services and if you are containing your
operating costs. For example, say your gross
margin was flat (for example staying at 30%
each month — indicating you are doing a good
job of managing your pricing and cost of goods
sold) but your net profit margin was decreasing
month-to-month. This might be an indication
that an expense area of your business was expe-
riencing an increase that you need to address
(for example, you need to reduce that expense
or generate more revenue to cover it).
So, back to inflation and why business own-
ers need to be looking at this carefully. The
reality is that likely costs are going up for your
business and if you do not know where and take
immediate action to mitigate this, your busi-
ness will suffer. The bottom line is that you’ve
got to be watching the bottom line!
If you need help understanding this for
your business, the advising team at the Small
Business Development Center can help. Email
sbdc@clatsopcc.edu or visit www.oregonsbdc.
com/clatsop for more information.
Jessica Newhall is the associate direc-
tor and Small Business Management program
manager for the Clatsop Community College
Small Business Development Center. She can
be reached at jnewhall@clatsopcc.edu.
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