At C2, we believe inflation is not a surprise. It is a management test.
We would like to use a client in a services business to show how they are managing the inflationary impact on their business. Because they believe they have a talented team, they want to minimize turnover and plan total salary increases at 5% annually.
Below are the recommendations we made for them and how they are managing the impact of inflation.
Start With the Math, Not the Emotion
If payroll represents 65–75% of your total expenses, a 5% annual increase may translate into a 3–4% increase in total operating costs.
Are billing rates increasing at least 5%? If not, the firm is absorbing inflation instead of managing it.
Annual rate reviews should not be optional. Clients expect thoughtful adjustments tied to value delivered.
Their approach: They are holding tight pricing until the second half of 2026.
Protect Margin Through Pricing Discipline
Some solutions include:
- Implementing CPI-linked adjustments
- Introducing tiered pricing
- Charging for scope expansions
- Reviewing underperforming engagements
Inflation forces clarity. Not all revenue is good revenue.
Their approach: They are managing margins at the client level and increasing fees for unprofitable clients.
Increase Productivity Per Employee
By standardizing processes, leveraging automation, redefining scope clarity, and ensuring high-value employees focus on high-value tasks.
Productivity gains must match a 5% increase in payroll.
Audit Indirect Spending
Review subscriptions, renegotiate vendor contracts where possible, consolidate tools, and benchmark insurance premiums annually.
Even small reductions in overhead projections protect operating margin.
Their approach: Healthcare premiums are being managed through increasing deductible limits.
Strengthen Cash Flow Discipline
Monitor utilization weekly, accelerate invoicing, tighten receivables, and build 3–4 weeks of payroll in reserves.
Inflation magnifies weak cash processes.
Their approach: They have adopted a 13-week rolling cash forecast.
The Leadership Question
Inflation is a structural reality.
Firms that proactively price, improve productivity, manage overhead, and protect cash will maintain margin, even while paying employees fairly.
Inflation does not hurt undisciplined companies; it exposes them.
Disciplined firms use it to become stronger, expand market share, and retain talented people.
C Squared Solutions offers fractional CFOs and COOs for businesses in several industries. We have successful track records in helping owners analyze situations like this and improve profitability. Give us a call and let us discuss your concerns.
