Inflation Just Hit, Now What?
September 20, 2022
Almost every business at one time or another finds the dilemma of being in an inflationary cycle. Businesses cannot control the economy but can take precautionary steps so the economy does not completely control the business. Businesses find that they are confronted in two different ways regarding inflation. On one side, their operating costs are increasing. On the other, they have to contend with increasing prices to their customers without driving business away.
Internally - Increased Operating Expenses
Inflation certainly brings increased operating expenses. While large businesses might be able to absorb higher costs and still have a healthy bottom-line net profit, it is more difficult for small businesses and SMEs to do the same. They must be both disciplined and creative in bringing costs down. Businesses should consider the following defensive measures:
· Work with suppliers – Suppliers understand the businesses they deal with. They want their customers to be successful and buy more. In an inflationary cycle, businesses should talk to their vendors regarding pricing and payment terms and what concessions can be made regarding each.
· Have alternate suppliers – Businesses should always be researching and making contacts with other than current suppliers. A business never knows when one of their major suppliers might have supply chain problems, quality issues, or delivery disruptions. This is just a good business practice. During a period of inflation, these alternate suppliers can be contacted to see if their pricing and payment terms can be more favorable for the business.
· High-moving profitable inventory – It is normal for most businesses to offer more than just one product or service (requiring inventory). During an inflationary period, it makes sense for businesses to stock up on high-moving, profitable inventory. Knowing the gross profit margin that each product or service produces for the business is important when it comes to ordering inventory.
· Remote workforce – Depending on the business, transitioning to a partial or complete remote workforce can help lower operating expenses. Of course, any costs associated with employees working remotely (computers, printers, Internet, etc.) must be factored into the cost-benefit analysis before any decision is made.
· Technology and automation – With technological advances made to equipment and new software continuously coming onto the market, businesses should investigate what is available regarding their specific needs and if new equipment and/or technology can improve operational efficiency, lower labor costs, and improve products or services that will help boost sales.
· Valuable employees – Keeping valuable employees is much more cost effective than recruiting, interviewing, hiring, and training new employees who might not be as productive as a long-term, loyal employee. In an effort to lower costs, a business could reduce hours if necessary to avoid layoffs. To keep employees loyal and motivated during a slowdown, the business could increase employee perks that result in very little or no cost to the business such as flexible work hours, remote work, personal development training leading to future growth opportunities, a surprise gift card to show appreciation, etc.
Externally - Increased Customer Pricing
It’s one thing for a business to do whatever is possible internally to lower costs and be prepared for an inflationary cycle. Businesses must also contend with increased pricing to customers and how that is handled so customers are not driven to the competition.
· Pricing, competition, and value – These three items go together. A business must not take lightly what it charges for its products and services. Pricing must be in line with competitors for the same relative value of products and services being sold. Surveying the competition should be ongoing.
· Outperforming the competition – Although pricing might be competitive, a business beats their competition by being better and/or different. Rather than going head-to-head with the competition fighting for the lowest price, uniqueness in the marketplace is what commands a higher price. When all factors are relatively the same, customers will gravitate to the lowest price. Rather than wanting to make sales because of lower pricing, businesses can increase profit by offering higher quality and unique products and services.
Opportunities come to those businesses that are prepared for an inflationary cycle. Costs should be controlled without losing focus of employees and customers. They are both necessary ingredients of a successful, profitable business.
Businesses must keep their best, talented employees internally while outperforming their competition externally. This should be the goal of any business anytime and is increasingly more important when inflation is thrown into the mix of normal business issues. Be prepared and work diligently to overcome the negative effects of inflation.