Inflation has become a critical short-term worry for practically all enterprises throughout the world for the first time in at least a decade.
Nobody knows how long the current inflation wave would endure, but a poll of economists conducted in the summer of 2021 suggested that it may last for years. More recently, the Federal Reserve of the United States hinted that the current inflationary surge might not be as severe as previously thought “temporary,” as some had speculated.
The traditional reaction to inflation is to choose one of three unappealing options. Managers might irritate their customers by raising prices, irritate their investors by decreasing margins, or irritate almost everyone by cutting corners to save money. When faced with this trilemma, most managers raise their rates and then look for creative ways to deal with the ensuing drama.
What they fail to see is that those three possibilities are tactical relics from a bygone period. When I was a kid in the 1970s, “Managers lacked the technology, data, and, in many cases, the idea to do anything bolder or more strategic when “stagflation” grabbed major economies. When inflation arrived during the Great Recession of 2008-09, managers were caught in the same trilemma as before.
Inflation will be different in 2022. Managers now have market visibility and adaptability that their forefathers could only have dreamed of even a generation ago. Managers now have access to much better data as well as more sophisticated tools for analyzing and transforming it into meaningful information for decision-making. It’s the perfect time for them to view inflation as a strategic opportunity rather than a tactical obstacle, and to choose from a wider range of possibilities. Rather than worrying about how much more they should charge their clients, they should focus their efforts on determining how and why they should charge them.
Streamline and automate processes.
Stefani discovered that restructuring his company’s warehouse resulted in cost savings. “We spent $5,000 on new shelves,” says the narrator. We discovered that it significantly increased productivity after installation.”
Ben Johnston, COO of Kapitus, a provider of development finance to small businesses, argues that improving processes may entail looking into automation for your company. “Re-examine processes as labor costs continue to rise,” he recommends. “Could time-consuming tasks be automated?” Is there software that can automate business procedures such as scheduling, order taking, billing, and payment collection? Is robotic processing a viable option for producing a product or finishing a repetitive task?”
Analyze profit margins.
“Pay close attention to your profit margins,” says e-commerce entrepreneur Sam Barrante. “Begin by reassessing your costs, and then consider the margins you’ll face in today’s environment. After that, start looking for ways to boost those margins while maintaining high-quality products and services.”
Improve productivity.
The higher your profit margins are, the faster and more efficiently you and your employees work. “Use productivity-tracking devices and applications,” Cassel advises.
Cut expenses when and where possible.
Bradley Katz, CEO and co-founder of Axon Optics, a therapeutic eyewear company, suggests cutting costs wherever possible. “Think about shrinking your workspace,” Katz advises. “For example, my company has a hybrid remote/in-office approach, which allows us to relocate to a smaller, less expensive location.”
Check to see whether your firm is paying for any products or services that aren’t being used, and if so, cancel them. Consider using different materials. You might be able to save money by using other goods or ingredients.
Stock up on supplies now.
By stockpiling up on basic supplies, Evan McCarthy has helped protect his company from inflation while also solving supply chain difficulties.
“McCarthy, the president of Sporting Smiles, which sells personalized dental goods, adds, “We renovated our warehouse and now have pallets full of materials going to the ceiling in the 10,000-square-foot building.” “We stockpiled up because the price of supplies was rising every time we ordered them. In 2021, we saw three significant increases in our cardboard box supplies.”
Also, because prices are certain to rise, consider renegotiating contracts with suppliers and purchasing significant equipment now.
Raise prices judiciously.
While raising prices isn’t ideal, it might be a good way to offset inflation’s impact on your company. Avoid alienating clients by imposing steep price hikes across the board. Instead, gradually increase prices in little increments while remaining strategic. Choose locations where customers will be less likely to see you.
Be ready for new customers.
“Inflation creates new customer segments automatically, so go after them,” says Stuart Robles, a partner at Briggs Capital, a small and medium-sized business mergers and acquisitions firm, and co-author of The New World of Entrepreneurship: Insiders’ Guide to Buying and Selling Your Own Business in the Digital Age.
“Many people be frightened by inflationary eras,” says Robles. “As a result, previously unreachable client segments and market niches may become accessible as your organization is viewed as a beacon of light in terms of possibly cheaper pricing and rates.”
How can a company withstand inflation?
What business tactics make sense in an inflationary environment? In this article, we look at how businesses should adjust their business strategies in an inflationary economy.
During an inflationary phase, the cost of products and services rises quickly, reducing the purchasing power of small businesses with suppliers and vendors. Businesses are compelled to raise their pricing with consumers to compensate for higher costs. This generates a vicious cycle of escalating costs, making it difficult to rely on established revenue streams.
At any given time, a few economists are usually warning about the risk of inflation. However, as businesses in the United States struggle to recover from the recent recession, inflationary warnings have become more prominent, raising fears that a time of inflation is on the horizon.
As a small business owner, you must be aware of the effects of inflation on your firm. Even more significantly, you must establish business measures to safeguard your company during an inflationary environment.
- Examine your revenue streams. Before inflation develops, now is the moment to assess the integrity of your revenue streams. Your company model may be jeopardized if your products are discretionary or if you won’t be able to compete on price during an inflationary period. Adjust your revenue forecast to account for inflationary pressures and make any necessary adjustments before prices rise.
- Reduce your expenses. Even if the market enables you to raise your prices to keep up with inflation, you’ll still have to cut costs. Cost reductions will boost your profit margins amid inflation in the best case scenario; in the worst case scenario, decreasing expenses will decrease your losses or perhaps save your company from bankruptcy. Secure long-term contracts with suppliers and plan for possible workforce reductions if the economy enters a lengthy period of inflation.
- Now is the time to borrow. Before interest rates start to rise, now is the time to borrow for capital and operating needs. To mitigate the impact of cyclical loan demands later, start by establishing an operational line of credit at today’s rates. Consider borrowing now for capital that will result in lower costs and/or more predictable revenue sources.
- Customer loyalty initiatives should be re-prioritized. Customer loyalty may be your saving grace during a period of severe inflation. As costs rise, your current customers will be enticed to switch to a lower-cost option. Create value-added incentives for your clients now to urge them to stick with your brand even if prices rise.
How do we combat inflation?
- Governments can fight inflation by imposing wage and price limits, but this can lead to a recession and job losses.
- Governments can also use a contractionary monetary policy to combat inflation by limiting the money supply in an economy by raising interest rates and lowering bond prices.
- Another measure used by governments to limit inflation is reserve requirements, which are the amounts of money banks are legally required to have on hand to cover withdrawals.
In India, how can we deal with inflation?
Long-term investing opportunities can help you benefit from inflation over time. Long-term investments have the potential to outperform inflation. Real estate, mutual funds, gold investments, equities, and other long-term investment choices are available.
Commodities, such as oil, gold, and other precious metals, have inherent value that is typically resistant to inflationary impacts. Commodities, unlike money, are almost always in demand, making them an effective inflation hedge.
Real estate is a popular investment choice among investors because it has consistently provided an inflationary hedge. Rental income and capital appreciation are two methods to profit from real estate investments.
Bond investing may appear illogical because fixed-income securities are vulnerable to inflation. To get around this problem, you can buy inflation-indexed bonds, which guarantee consistent yields regardless of the level of inflation in the country.
Stocks have a better chance of keeping up with inflation than bonds. Investors should concentrate their efforts on companies that can pass on growing product costs to customers, such as growth stocks and the consumer staples sector.
Inflation is a real thing, and disregarding its consequences can have a significant influence on your financial performance. To grow the value of your savings over time, you should put them into investments that have the potential to outperform inflation. As a result, your investment strategy should determine the rate of inflation and invest in assets that can offset it. Good luck with your investments!
How does inflation get adjusted?
If you have data that is expressed in nominal terms (for example, dollars) and want to convert it to real terms, follow the four steps below.
- Choose a deflator. The Consumer Price Index (CPI) is the best deflator to employ in most instances. The Bureau of Labor Statistics website (http://www.bls.gov) has data on the CPI (for the United States).
- Divide the value of the index in each year (including the base year) by the value in the base year. The base year’s value is one.
- Divide the nominal data series value by the number you calculated in step 3 for each year. This tells you how much anything is worth in “base year dollars.”
An example can be seen in Table 16.2, “Correcting Nominal Sales for Inflation.” As shown in the second column, we have statistics on the CPI for three years. Steps 13 are used to build the price index with the year 2000 as the base year. In the fourth column, sales in millions of dollars are listed. We split sales in each year by the value of the price index for that year to account for inflation. The outcomes are displayed in the fifth column. Real sales do not grow as quickly as nominal sales because of inflation each year (the price index rises over time).
What is the best way for the economy to recover from inflation?
Inflation can be both advantageous and detrimental to economic recovery in some instances. The economy may suffer if inflation rises too high; on the other hand, if inflation is kept under control and at normal levels, the economy may flourish. Employment rises when inflation is kept under control. Consumers have more money to spend on products and services, which benefits and grows the economy. However, it is impossible to quantify the impact of inflation on economic recovery with total accuracy.
Is inflation bad for business?
Inflation isn’t always a negative thing. A small amount is actually beneficial to the economy.
Companies may be unwilling to invest in new plants and equipment if prices are falling, which is known as deflation, and unemployment may rise. Inflation can also make debt repayment easier for some people with increasing wages.
Inflation of 5% or more, on the other hand, hasn’t been observed in the United States since the early 1980s. Higher-than-normal inflation, according to economists like myself, is bad for the economy for a variety of reasons.
Higher prices on vital products such as food and gasoline may become expensive for individuals whose wages aren’t rising as quickly. Even if their salaries are rising, increased inflation makes it more difficult for customers to determine whether a given commodity is becoming more expensive relative to other goods or simply increasing in accordance with the overall price increase. This can make it more difficult for people to budget properly.
What applies to homes also applies to businesses. The cost of critical inputs, such as oil or microchips, is increasing for businesses. They may want to pass these expenses on to consumers, but their ability to do so may be constrained. As a result, they may have to reduce production, which will exacerbate supply chain issues.
What causes inflation when money is printed?
If you create more money and the number of items remains the same in normal circumstances (e.g. no shutdown, most people employed), we will see higher pricing.
This appears to be reasonable, however the current economic situation is totally different.
More detail on why printing money might not cause inflation
With the formula MV=PY, the quantity theory of money attempts to establish this link. Where
- Price level (P) would rise if V (velocity of circulation) and Y (output) remained constant.
- However, V (circulation velocity) is decreasing. People are staying at home rather than going out to shop.
Another approach to look at this issue is to consider why inflation is so unlikely when output is declining by 20%. (record level of GDP fall)
What impact does inflation have on small businesses?
- Increased costs: As a result of inflation, the costs of supplies and services used to run a firm may rise.
- Price increases: As a result of current labor shortages and supply chain challenges, several businesses have seen their costs of items sold rise. If the cost of supplies, raw materials, or services rises, businesses may consider raising the prices of their products and services to offset the cost increases.
- Profit margins may narrow as a result of increased costs. This could mean implementing changes to better monitor and estimate profit margins for businesses. You can continue to plan a road to success by preserving present profit margins during periods of inflation or identifying possibilities to enhance them.
- Changing or reducing inventory: Changing or reducing inventory can help you save money. Some organizations choose to keep a low inventory, saving money on storage costs by purchasing only what they require. Others may choose to purchase goods and supplies closer to home, potentially saving money on transportation costs.
Ice Cream Social, a Michigan-based ice cream truck and digital agency, saw its cost of goods sold change as well. They concentrated on selling local goods when their business season shifted from summer to fall. In a difficult time, offering apples, a beloved fall staple in the area, made the supply of apples and cider easier to predict.