Preparing For Inflation

We could see high inflation* (when the cost of goods and services increases rapidly) in late 2021 and beyond.  It would befit the small business owner to be prepared. 

Let’s look at how inflation can affect your business and what you can do to contend with it.

Evaluate Revenue Streams – Ideally do this before inflation actually occurs.  If your offerings are discretionary or if it is unlikely that you will be able to compete on price during a time of inflation, your business model may be in serious jeopardy.  Reconfigure your revenue forecast to accommodate inflationary pressures and make necessary adjustments in advance of rising prices.

Borrow Now, if you have to – As interest rate are expected to rise.  Begin by securing an operating line of credit at today’s rates to buffer the impact of cyclical lending needs later.  Also, consider borrowing now for capital that will result in a reduced cost structure and/or more secure revenue streams.  

Ask for a fixed-rate loan (instead of an adjustable-rate loan) so your interest rate stays the same regardless of economic conditions.  The larger and longer the loan period, such as for a mortgage, the more important it is to have a fixed-rate loan.

If you have a variable rate loan, they are going to renew at much higher rates during times of inflation; pay these loans down as soon as possible. 

Wages – It is not feasible to lock in your employees’ wages; they are going to, at a minimum, demand cost-of-living increases.  Plan for wage increases.  Also, consider hiring interns and freelancers who you can get at a fixed rate and do not have to pay benefits to.

Inventory – One way to fight an anticipated inflationary scenario is to lock in prices early.  You can do this either through options/futures contracts or simply by signing long-term contracts with suppliers. 

If you cannot lock in prices, consider stocking up on inventory.  Purchasing goods before price increases could put you in a much better competitive position than your competitors.  But, don’t risk cash reserves just to buy inventory.

Finally, renegotiate with your suppliers and ask suppliers for discounts.

Efficiency And Productivity – Spend time improving your processes productivity.  Look for areas of waste; then spend time and effort implementing ways work can be done more efficiently.  Conduct timely technology and services audits.

Reduce Other Costs – Consider relocating to a smaller, less expensive working environment.  If you rent, lock in the amount you pay.  Eliminate finance charges by paying on time.  And, prepare for the possibility of workforce reductions should the economy enter a period of prolonged inflation.

Prices – There are going to be some costs that you can’t lock in ahead of time, so you may be forced to raise the prices of your products or services to offset higher expenses.  However, smaller businesses are reluctant to raise prices when they already see business tailing off due to inflation and increasing the risk customer alienation.  A couple of ways to raise prices include: giving your customers some warning, saying and/or posting we need to raise prices starting on this future date to continue delivering the top-notch offerings that you’re grown accustomed to; and consider frequent small price increases rather than one or two big price increases. 

Customer Loyalty – Reprioritize your customer loyalty initiatives.  To prevent your customer base from moving to lower priced alternatives, secure your customer base by creating value added incentives to encourage them to stay with you.

Receivables – To minimize customers taking advantage of you by not paying on time and then you having to bridge cash shortfalls, reduce collection issues by tighten up payment terms, possibly instituting penalties for late payments.  Stay disciplined in collecting payments.

Investing Funds – With inflation and the value of the US dollar decreasing, the purchasing power of your cash will be dramatically lower after just a few years.  Any funds that you don’t expect to use in the near-term should be invested in assets that protect you against inflation; talk to your financial advisor about possibly investing in treasury inflation-protected securities (TIPS), mutual funds, and ETFs.

In summary, inflation can be a nightmare for your business if you are not prepared.  However, if you prepare before we start seeing higher prices, you can mitigate the effects of inflation or even benefit from it.

* Inflation is a period in which the overall prices of everyday goods and services start to rise.  Business cost of materials and labor rise squeezing profits.  Rising costs may or may not be able to be passed on to customers depending on the price elasticity of demand for of your offerings.  When inflation causes costs to rise, often interest rates will spike.  Inflationary pressures cause customers to try to delay payments in order to be able to pay with “cheaper dollars” so business cash flow suffers.

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