5 tips for SMEs to navigate rising costs

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With the ongoing effects of inflation hindering domestic economic growth in Malaysia, small and medium-sized enterprises (SMEs) – in particular – may be susceptible to the direct impact of cost fluctuations of essential inputs such as raw materials and labour. Strategising around inflation and rising costs will thus increasingly become essential in order to run a successful business in Malaysia.

To ensure prolonged success in this ever-changing landscape, here are five tips for SMEs to navigate rising costs:

1. Identifying cost drivers

For starters, take the time to conduct a cost analysis to identify the specific factors that are driving costs. This process allows you to carefully examine where your resources are being spent and be smart about managing them. This may vary from business to business in Malaysia, but some common cost drivers include the cost of raw materials, production costs such as labour, overhead expenses like rent and utilities, and supply chain costs associated with shipping and logistics.

Once you know what’s driving your costs up, you can develop strategies to address them. For example, if you find that your largest cost driver is shipping costs, you may negotiate rates with your current vendor or switch to other trusted logistics partners for solutions that match your needs.

2. Outsourcing certain tasks and processes

You may also consider outsourcing non-core functions such as accounting, bookkeeping and web design. One of the biggest benefits of outsourcing is the ability to reduce overhead costs. By entrusting non-essential tasks to external professionals or companies, you can avoid taking on any additional full-time employees. This means that you don’t have to worry about salary, health insurance costs, or other benefits associated with hiring in-house staff.

Using external resources also means tapping into specialised skillsets that may not be available within your own team or company – allowing you to create higher-quality work at a faster pace. Furthermore, you only pay for what you need when you need it, making outsourcing a cost-effective solution for small businesses in Malaysia.

3. Diversifying revenue streams

Diversifying revenue streams is another strategy SMEs should consider when navigating rising costs. This means having multiple sources of income instead of just one. This can help to insulate your business from market fluctuations and provide a steadier stream of profits. One way to get started is by tapping into new markets and expanding your customer base. This could mean expanding geographically or catering to new demographics in Malaysia.

For example, if you’re a brick-and-mortar store selling cosmetics, you could start offering your products online and widen your reach to international customers. Catering to a larger target audience gives you the opportunity to spread out your cost drivers over a broader range of sales. By shipping your products to customers in the United StatesIndonesia and many other countries, it can play a part in mitigating the strain of rising costs on your business.

4. Building financial resilience

Financial resilience is integral for any business owner – but it's especially important for SMEs to weather the storm of rising costs. There are several ways to build financial resilience, but two of the most important are saving for a rainy day and reducing debt.

To start your rainy day fund, begin by setting aside a fixed amount each month. If you can, automate this process by setting up a recurring transfer from your business account to a savings account. Aim to have enough saved up to cover at least three to six months’ worth of operating expenses.

Having a rainy day fund also gives you more flexibility when it comes to managing your small business finances. If you do find yourself facing an unexpected cost, you can decide whether it makes more sense to dip into your reserves or explore other financing options – such as taking out a loan – without feeling pressured to make a quick decision.

Reducing your debt load is also key to financial resilience. The less debt you have, the more flexible you'll be in times of need. One of the most effective is to negotiate with your creditors. If you're able to get a lower interest rate or extended payment terms, you can gradually improve your day-to-day cash flow position and protect your business during tough times.

5. Staying focused

Finally, it’s important for SMEs to stay focused on their long-term goals despite any challenges along the way. Short-term solutions may temporarily alleviate some of the financial pressure but they won’t necessarily provide long-term success or sustainability if they don’t align with your company’s ultimate objectives.

This, along with the above steps, can better prepare your business to navigate any obstacles while achieving the desired outcomes over time.