🔒Cutting costs; increasing prices; renegotiating contracts; closer scrutiny on financials — Here’s how CT businesses are coping with inflation

While the pace of inflation slowed during the month of May, businesses continue to face pressure from higher prices on goods and services that are cutting into profits and making it harder to operate.

The U.S. Bureau of Labor Statistics reported this month that its consumer price index increased just 0.1% in May, the lowest increase since March 2021. That brought the annual rate of inflation down from 4.9% to 4% — still well-above pre-pandemic levels.

Businesses have confronted higher prices for more than a year on everything from labor and electricity to transportation and equipment.

The Hartford Business Journal spoke with several wealth advisory, accounting and law firms to learn more about what they’re hearing from business clients, and what they’re recommending to them to deal with rising expenses amid a still uncertain economy.

“What I’m hearing from all clients in general is that it’s getting hard out there — the costs for everything to run a business are getting higher and cash flow is getting tighter,” said Mike Baum, vice president and associate financial advisor at Weiss, Hale & Zahansky Strategic Wealth Advisors, which has offices in Pomfret and Tolland. “These business owners are really faced with a challenge.”

Analyze spending

Brenden Healy, a partner at Hartford-based accounting and advisory firm Whittlesey, said the most important advice he’s been giving his business clients is to keep a closer eye on their financials.

“They should look at them more often than they would when times are easier and when there’s less inflationary pressure,” Healy said.

Companies that do monthly or quarterly financial reporting should think about doing them more frequently, he said. It will allow companies to “react quicker” to changes like the rising cost of goods.

Cash flow planning is important, Healy added, and giving more detailed year-out projections based on economic conditions could be the difference in how prepared a company is for inflation.

Baum said that a deep analysis of a company’s spending habits is also key. If there are areas that can be tightened up and made more efficient — either operationally or through cost reductions — a business should consider changes.

“What we’re recommending and really coaching a lot of our business owners to think about is increasing efficiency,” Baum said. “You can then see what specifically is contributing to profits or losses in the company.”

After a deep dive on financials, businesses should prioritize products and services that offer the highest return on investment.

Products or services that are expensive to produce but not generating a lot of revenue could potentially be eliminated, he said.

“In these conditions, it’s better to focus on higher return-on-investment products, services or activities that are more revenue-generating,” Baum said. “Focus on what you’re best at.”

Ryan O’Donnell is a Hartford attorney at Pullman & Comley who leads the law firm’s hospitality practice, which includes representing restaurants that have faced significant inflation headwinds.

He said the high costs of food and labor are the top issues his clients face. In an industry where margins are already slim, rising costs pose a significant threat to profitability, he said.

“You’re going to have to increase the cost of food at some point, the menu prices are going to go up. But how do you address that with your guests?” said O’Donnell, whose clients include the Connecticut Restaurant and Lodging associations. “The most successful restaurants I’ve seen are the ones where owners are taking a hands-on approach on the ground floor, talking to customers, and going out of their way to enhance the guest experience so that if menu costs are ticking up a little bit, guests are still going away very satisfied, perhaps even more satisfied than they were before those costs went up.”

Maintaining or improving the customer experience as prices increase is important, said Charles (Chip) Olson, a partner at Farmington-based Connecticut Wealth Management.

“Clients and customers should feel that they’re actually getting something for that additional cost,” Olson said.

It also might be time for companies to revisit the prices they pay vendors or suppliers in their supply chain, said Baum, the financial advisor.

“That could mean purchasing in larger quantities, if you can get it at a decent price and you think the cost of that material is only going to steadily increase,” Baum said. “Having a stockpile might hurt upfront but pay dividends in the long run.”

Olson said given current economic conditions, companies should review their supplier contracts to make sure agreements are “fair and equitable.” He also said an advertising budget and other “non-core” business activities could be on the chopping block during inflationary times, with companies shifting focus to social media or email marketing campaigns.

But Baum said cuts to advertising aren’t always a prudent option.

“It might be really tempting to slash that budget because the payoff for acquiring new customers sometimes takes a long time,” he said. “But what we’re actually saying to business owners is that if they can stay the course with their advertising, it may actually be an opportunity where other competitors are pulling back, and they could grab more attention and market share.”

Labor inflation

Healy, of Whittlesey, said automation could be a good way to hedge against higher labor costs, which have been exacerbated by a tight labor market.

“There are times when you can automate things and use technology or even AI to take care of the simpler tasks in your business,” Healy said. “You may need to make an investment for that, but oftentimes the long-term payback is well worth it.”

Baum said automation can be used to improve work flows in some cases, but that doesn’t necessarily mean reducing the workforce. While layoffs can offer short-term savings, after the economy stabilizes, a business could find itself shorthanded.

“Hiring and training is obviously very costly,” Baum said.

But automation and technology don’t solve all problems. Restaurants are still dealing with labor shortages following the COVID-19 pandemic, O’Donnell said, so finding ways to support employees during inflationary times is important.

Without increasing wages, some businesses could opt to boost other benefits as a way to support staff and retain top talent.

Olson said attracting employees costs money, and retaining them is sometimes even more costly. Finding ways to improve workplace culture could be the difference between growing or sustaining a workforce, he said.

“Flex hours are an example, benefits beyond health insurance are another,” Olson said. “Employees feel better about their work-life balance.”

Connecticut Wealth Management Partner and Chief Client Officer Emily Wood said the most important focus for a business owner going into or coming out of an inflationary period is setting a clear vision for where the company is headed, and what its goals are.

“The reality is, it’s not a matter of if inflationary pressures will come again, it’s just the timing of when,” Wood said. “It’s about making sure that these potential pressures are included in how you are mapping out the vision of where the company is going, and how you’re communicating that to key stakeholders.”