by Scott K. Schmidt, Chief Financial Officer, U.S. Money Reserve
Inflation is here and could be here for a while. Here are a few ways to deal with it.
As the world has begun to open up again after the global COVID-19 pandemic that turned various economic models on their heads, inflation has settled in. No one knows how long it will last or how bad it will get, but plenty of business leaders, economic leaders, and political heads of state are contending with the effects of the rising cost of goods and reduced buying power.
There is much to know and understand about inflation, but more importantly, businesses need to focus on how to both protect themselves from inflation and even benefit from it. Here are five ways companies can deal with rising inflation.
What Is Inflation? How Does it Affect a Business?
Before we dive in, let’s tackle the basics. If you’re a small business owner (or run a large corporation!), it’s essential to understand what inflation is and how it affects your business.
First, inflation is generally defined as a period when the cost of a basket of diverse goods increases while customers’ buying power decreases. McKinsey & Company defines it as “a broad rise in the prices of goods and services across the economy over time, eroding purchasing power for both consumers and businesses.” At the consumer level, this means a gallon of milk, which cost $2.90 in 2018, now costs $4.41, according to the USDA.
The Federal Reserve is the central bank of the U.S., and it monitors a number of different economic factors that help indicate how healthy the U.S. and global economies are. If the Fed sees anything it doesn’t like, it will raise or lower the interest rates at which it lends cash to other banks. The rate change is then passed on to consumers and businesses, effectively acting as either an accelerator or a brake for the economy. The Fed focuses on a number of price indexes to determine whether we’re facing several potential threats to the economy — but inflation is the one it keeps the closest eye on.
Inflation makes doing business more expensive. Everything from the costs of the components that go into your good or service to the cost of shipping and transportation is affected by inflation. Inflation is problematic because it can lead to recession and even economic depression.
While the most recent measures show that inflation drifted down and eased in September 2022, it still hit a 40-year high. According to USA Today, current measurements show that consumer prices increased 8.2% over last year, as food and rent prices offset falling gas prices.
Inflation affects businesses the same way it affects consumers: The required materials and services that businesses need to stay open become more expensive. This means everything from components to transportation may become pricier for businesses. Yet businesses also face additional pressure from the other side since consumers cut back on their spending during an inflationary period. Inflation also means companies will face cost increases for expenses like employee pay and even healthcare, as well as the cost of borrowing. Essentially businesses get squeezed on all sides when the economy, at home and globally, is facing inflation.
Ways Businesses Can Deal With and Even Benefit From Inflation
While all of this sounds dire and difficult (and it can be!), it doesn’t mean the end of the world if you’re a business owner. You can take a few steps to ensure that your business can deal with and even benefit from an inflationary period. Here are some ways you can take advantage of inflation.
Take a Good, Hard Look at Your Spending.
Since the price of borrowing is higher, and your buyers or consumers are likely to be cutting back on extraneous spending, it’s time to take a closer look at how your business is spending its resources. As the Harvard Business Review points out, it’s vital to get a really clear idea of your spending and sort it based on your business process, function, cost category, and business unit. This will help you track exactly how your cash flows through the entire business chain, and you can make better, more informed, and more cost-efficient decisions based on that knowledge.
Check in With Your Suppliers.
Business owners aren’t unfamiliar with supply chain shortages — we have all weathered the pandemic storm over the last few years. We’ve all had to better understand how our businesses integrate into the global economy and how that integration affects our ability to buy the goods, supplies, and parts we need to keep our businesses running. Supply chain disruptions can make or break a business and often reveal where companies might be weakest.
Checking in with your suppliers and even planning to have backups should your needed suppliers have sourcing issues is the right way to move through an inflationary period. Essentially, you should be sure you aren’t overly reliant on just one supplier.
Over the last few years, business owners have seen the effects of having their supply chain dependent on one supplier. Business owners couldn’t keep up with demand when imports and exports were halted because of the pandemic. It revealed a number of faults in supply chain strategies.
Consider setting up or at least planning for an alternative supply chain. Make sure you have a supply strategy that can be expedited should you need it and review the stock levels you currently have (and what you’re projected to need) for the next three to six months, if not longer. No one knows how long these inflationary periods can last but, having a plan in place should help you weather the storm and even thrive during it.
Take a Closer Look at Your Pricing.
If you want to thrive during an inflationary period, you must take a good, hard look at your pricing. That’s because pricing impacts both your standing in the competitive marketplace and your consumers’ behavior. Will they continue to purchase from you if you raise your prices too high? Probably not, so it pays to take a closer look at your pricing strategy now.
Your pricing strategy, according to NetSuite, should focus on what they call the “four Cs”: customers, costs, competitors, and cash. I suggest you focus your attention on your customers, costs, and competitors first.
First, let your customers’ changing buying habits guide your pricing strategy. Are people opting out of purchasing your particular widget because you have your product or service priced too high? How important is pricing in customers’ decision-making? If your company is affected by pricing sensitivity, pay close attention to how your consumers behave in this current environment.
Second, it makes sense to return to the spending analysis you did when you originally considered costs. How much is it costing you to keep your business up and running now? Where can you cut costs so you are priced right in the market? These are considerations to keep in mind when taking a look at your pricing.
Finally and probably most importantly, stay attuned to what’s going on in your specific market. That means you should have a good idea of how your competitors are priced and what they do to maintain their market position during this period. If you must raise prices to accommodate for inflation, make sure you communicate any price changes clearly and openly with your customers. How you handle pricing increases can make or break your business.
While it may seem counterintuitive to invest in automation during an inflationary period, it can make good business sense. With labor costs on the rise, it might make sense to finally take the plunge and automate some part of your business you’ve long been considering. Automation can help cut costs in the long run and help you stay competitive at the same time. Automating means less labor will be needed in the long run, which can help you stay afloat during leaner times.
Learn From Other Companies.
This isn’t the first time that the global economy has faced inflation, and it certainly won’t be the last. In fact, this period of inflation offers a prime opportunity to learn from other companies that have weathered past (and current) inflationary storms.
Read everything you can about how other companies in your industry and outside of it are coping with inflation. What are they doing that you might be able to apply to your own business? How are they getting smart about their investments or their labor management? Keeping up to date with the changing environment can make a world of difference in the long run.
The Bottom Line on Making It Through an Inflationary Period
This can seem like a really scary time. Facing rising costs, reduced labor, and the numerous global issues we’re all reading about in the news can make managing your business much trickier. Yet if you follow these five tips for dealing with inflation — and get focused on what matters most to you and your business — you will likely thrive and grow through these inflationary times.