Inflation rates have hit a record high since 1981, with a CIP increase of 9.1% from the previous year. The only other crisis closer to the current situation is the 2008 inflation. But unlike the 2008 inflation, the post-pandemic inflation is worsened by hitches in the supply chain and a labor shortage. However, there are valuable lessons to learn from the 2008 crisis. Companies that used a cost-cutting approach performed better than those that only applied the producer price index (PPI) tactic. Here, you will learn how to track variable costs and enhance efficiency in your budgetary controls.
You cannot cut your variable costs if you do not understand them. Util Auditors, LLC can help you audit your utility bills to help you track variable costs.
The Effects of Inflation on a Business
Inflation is the general rise in the price of commodities. During an extended inflation period, businesses face an increase in input, utilities, electricity, fuel, and labor costs. Inflation impacts the variable costs of a business.
In this case, the variable costs are the expenses that increase with the output. The post-pandemic inflation has, however, worsened due to disruptions in the supply chain and labor shortages. As a business owner or manager, learning how to respond to inflation will help you navigate post-pandemic inflation.
How Businesses Respond to Inflation
In responding to inflation, businesses have to either:
- Absorb the increase in cost by accepting a lower bottom line as the profit margins shrink, or
- Increase the price of their products to compensate for the rise in the cost of doing business
Absorb the Increase in Cost of Doing Business
A business can choose to bear the increase in the cost of inputs and utilities instead of passing it over to the consumer. Since business organizations sell their products or services for a profit, absorbing the increase in the cost of inputs and utilities means the business would have to contend with a lower bottom line.
If the inflation extends for a longer time, a business organization that fails to pass over the increase in cost to the consumer starts to operate at a loss. Business organizations that do not want to continue incurring losses can apply the Producer Price Index approach.
Producer Price Index (PPI)
The Producer Price Index measures the changes in the prices of commodities from a business perspective. The index measures price changes every month, and changes in the PPI reflect the rising prices caused by inflation. In the first half of 2021, for example, the PPI rose 10% in the G7 countries.
Businesses that apply the PPI strategy will increase prices to compensate for the changes in the cost of inputs and utilities. However, consumers also experience the impact of inflation as it becomes hard for them to meet the increased costs.
An extended inflation period puts business organizations between the proverbial wall and hard rock. If the customers cannot afford the increased prices, the firm will not have a market for its products. But a failure to increase the prices of goods and services means the business operates at a loss.
Both situations can push a firm out of the market. In such a delicate balancing act, only smart business organizations navigate through inflation with a success story. Such organizations apply the PPI strategy while tracking variable costs to monitor inflation and contain the cost of doing business.
Tracking Variable Costs
Variable costs represent a large portion of the cost of production. However, the variable costs are invisible and sometimes treated as fixed costs in the balance sheets. As a result, some organizations do not treat variable costs and utilities as significant elements of the production process.
However, you would be surprised to learn that 80% of utility and service billing statements contain errors that increase your production cost. Contact Util Auditors, LLC to help you audit your utility bills to eliminate billing errors.
How to Track Variable Costs and Reduce Wastage
Tracking variable costs means taking steps to understand the trends in utility pricing. Understanding your variable costs helps identify your needs, leakage, and developing mechanisms for reducing waste. One of the best methods of tracking your variable cost is conducting a utility audit. The audit reveals your organization’s need for:
- Water & Sewer
- Natural Gas
- Other Commercial Fuels
Electricity accounts for a significant component of energy expenses. An increase in the cost of electricity affects the price of products and services. Tracking your electricity bills can help you identify errors in the billing statements and seal wastage in your consumption to help you contain the rising cost.
An audit of your electricity consumption can also help you develop a strategy for enhancing efficiency and reducing energy requirements.
Water & Sewer
Businesses operating in different locations may encounter challenges with their water and sewer expense management. Tracking your water and sewer expenses helps identify hidden costs and errors in the billing statements. In addition, you also get an opportunity to develop methods of reducing wastage to help you cut costs.
Natural Gas and Other Commercial Fuels
Tracking your natural gas consumption also helps you identify cost-saving mechanisms as you track variable costs. Cutting your natural gas expenses will help absorb the rising costs without hurting your customer base.
Track Variable Costs to Monitor Inflation
Tracking your variable costs helps you monitor inflation and develop strategies to cope with the rising costs of inputs and utilities. When you follow your variable costs, you can track the changes in prices and prepare your response strategy in advance. You also get an opportunity to:
- Identify errors in your billing statements
- Request refunds
- Enhance efficiency in your production process
With a clear understanding of your utility bills, you can monitor inflation and contain costs.
Contact Us Today to Get Started
At Util Auditors, we can help you track your variable costs to understand the post-pandemic inflation and contain costs. We also conduct utility audits to help you identify errors in your billing statements and wastages. Our utility audit services help you cut production costs and develop a pricing strategy that gives you a competitive advantage during inflation. Contact us today for more information about how to track variable costs and improve expenses.