5 Ways to manage fuel costs and protect your margins

By Mark Valentino, Head of Business Banking at Citizens

Direct answer

Businesses can manage rising fuel and operating costs by closely tracking expenses, understanding how cost increases affect margins, forecasting cash flow under different scenarios, maintaining access to credit and working with their banker to plan for changing conditions.

Rising fuel prices increase expenses for almost every business, from higher transportation and delivery prices to increased costs for supplies and services. Elevated fuel, labor, utility and other operating expenses all put pressure on cash flow and margins.

Citizens research shows that rising expenses are a widespread challenge. More than half of businesses with $5 million or more in annual revenue cite managing rising costs and inflation as a challenge.

In my work with business owners, I see how knowing expenses and margins, cash flow forecasting and access to funding help businesses prepare for and respond to higher costs.

Here are 5 steps I recommend to manage expenses and protect margins.

1. Track costs closely

Managing higher costs starts with knowing exactly where the increases are occurring and what they mean for cash flow and margins.

For a fuel-dependent business, that might mean creating a dedicated expense category for fuel within your accounting system and tracking fuel as a percentage of cost of goods sold (COGS). Other businesses can take the same approach by identifying their largest expense categories and watching how changes affect cash flow and margins.

Real-time visibility may be particularly important when costs change quickly. Digital financial tools may make it easier to monitor expenses and cash flow and make adjustments earlier. In fact, 55% of $5M+ businesses are using or plan to use digital cash management tools to improve real-time visibility into cash flow.¹

2. Know margin limits

Tracking rising costs is different from knowing how much of an increase your business can absorb. What happens to margins if fuel costs rise 10%, remain elevated for 6 months, or fuel, labor and supplier costs increase at the same time?

I like to remind business owners that forecasting and scenario planning can answer these questions before higher costs become a margin problem. In fact, 44% of $5M+ businesses are conducting cash flow forecasting specifically to monitor volatility.¹

Knowing your limits in advance gives you time to consider adjusting pricing, reducing or deferring expenses, accelerating receivables or using additional working capital.

3. Plan for credit needs

Even a profitable business may face a cash flow gap when expenses rise faster than it can adjust pricing or collect receivables. Because of this, I encourage business owners to make sure they have access to credit during stable periods so they have options if costs rise unexpectedly.

A line of credit, for example, may help cover a temporary increase in working capital needs without disrupting other business plans. Having credit in place before you need it gives you time to consider your options instead of seeking financing when cash flow is already tight.

Talk with your banker about how much credit makes sense for your business and how your needs might change under different cost scenarios.

4. Communicate pricing changes clearly

At some point, you may need to pass a portion of higher operating costs on to customers.

Before making a change, review customer contracts to determine whether adjustments to pricing or the addition of a fuel surcharge are allowed. Then determine how much of the increase you need to recover to protect your margins.

Give customers as much advance notice as possible and explain the reason for the change. If fuel is driving the increase, itemizing a fuel-related charge may help customers understand why their costs have changed. If several operating expenses have increased, a broader pricing adjustment may make more sense.

5. Work with your banker

I see the banking relationship as part of the planning process and encourage business owners to talk with their banker before rising costs create a cash flow problem. Regular conversations help your banker understand your business, financial position and goals, so you can work together to identify potential working capital needs and ways to maintain liquidity.

Citizens research underscores the importance of this relationship. 59% of financial decision-makers at midsize businesses say their bank is their preferred source for help with cash flow forecasting, compared with other advisors and information sources.²

An ongoing banking relationship also means you can respond quickly to changes in costs, margins and other business conditions.

Build resilience before costs rise

Fuel prices will rise and fall, and your business will continue to encounter changes in labor, supplier, transportation and other operating costs. The goal is not to predict every increase. It is to build the financial visibility and flexibility to respond when costs change.

For me, that comes back to preparation. When you understand your margins, forecast cash flow, maintain access to capital and regularly review your financial position, you have more options.

Ready to take the First Step?

Here's the part worth acting on. If you're already paying for fuel every week, that spending can earn its way back. A new Citizens business checking account pays up to $100 a month on gas purchases, up to $1,200 in year one, and a new Citizens business savings account pays up to $150 a month for 12 months for bringing over and holding new money. Stack them and that's up to $3,000 on everyday spending and saving you're doing anyway. Heading into a year of planning and pressure, the smartest move may simply be putting your cash somewhere that rewards it.

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Frequently Asked Questions

Q. What business expenses should be reviewed when operating costs rise?

Start with the expenses that have the greatest effect on profitability or are most likely to change quickly. In addition to fuel, that could include labor, inventory, raw materials, shipping, utilities, insurance and financing costs. Reviewing fixed and variable expenses separately may also help identify which costs you have more flexibility to adjust.

Q. How often should a business update its cash flow forecast?

The appropriate frequency depends on your business and how quickly conditions are changing. During periods of greater cost volatility, updating forecasts more frequently may help you identify potential cash shortfalls sooner. Forecasts should also be revisited when there is a significant change in expenses, revenue, customer payment patterns or other assumptions.

Q. How do faster receivables help when operating costs increase?

Faster collections may improve working capital by shortening the time between making a sale and receiving the cash. You might review invoice timing, payment terms, outstanding receivables and available electronic payment options to identify opportunities to accelerate cash coming into your business.