During periods of rising inflation, business owners may face growing operating expenses as they pay more for labor, raw materials and other supplies. Because inflation reflects a decrease in the overall purchasing power of money, they might experience a decline in sales because customers aren’t able to afford as many products or services as they previously did.
As the pandemic eases and businesses continue to accelerate production of in-demand goods, prices will likely begin to moderate and even decline. In fact, history has demonstrated that supply shortages often result in supply gluts over time. This is often the result of businesses ramping up production to take advantage of higher prices for goods and services that are in short supply. This acceleration of production often leads to a supply glut and lower prices.
Businesses with opportunities to generate additional revenue during periods of short supply must balance this short-term opportunity with longer-term organizational and financial goals.
7 ACTIONS BUSINESSES CAN TAKE
Twenty-two percent of small-business owners cited inflation as their single most important business problem, according to a January 2022 survey conducted by the National Federation of Independent Business. Despite encouraging signs that inflation rate will begin to moderate over the next several months, businesses may be unsure what actions to take to position themselves for the future.
Here are seven strategies for business owners to consider during periods of rising inflation:
1. RETHINK PRICING AND MARKETING STRATEGIES
Rather than implementing an across-the-board price hike, consider targeting price increases to specific product or service lines where customers are most likely to be receptive. Stay attuned to the pricing strategies of competitors to ensure your business is aligned with the marketplace. And focus on boosting sales through creative marketing approaches, such as cross-selling to existing customers, offering referral discounts or introducing special promotions. Remember that increasing production to take advantage of short-term opportunities can lead to excessive inventory down the road.
2. TRIM EXPENSES
Now’s the time to cut back on nonessential expenses. Carefully review your production and operational costs with an eye toward economizing. It also may be an ideal time to implement lean management principles to improve the efficiency of your processes and reduce waste.
3. REVISIT FINANCIAL INVESTMENTS
Businesses with an abundance of cash should consider investing it in higher-yield assets with growth potential to keep pace with inflation. If you have a variable rate loan, consider converting it into a fixed-rate loan so you’ll have certainty about your monthly interest costs and can budget accordingly. Think about investing in property and equipment because those assets historically keep pace with rising costs during inflationary periods.
4. INVEST IN TECHNOLOGY
Explore opportunities to boost productivity and operational efficiencies through new technology — whether it’s new hardware and software for office staff or advanced equipment for automating manufacturing processes. But before finalizing purchasing decisions, be sure to closely evaluate the ROI of new technology on your enterprise.
5. LOCK IN LONG-TERM AGREEMENTS
Pursue longer-term agreements with your vendors/suppliers, and seek opportunities to negotiate rates by offering to prepay or shorten your pay window. Also, speak with your landlord about a longer-term lease with agreed-on, fixed increases. These arrangements will give more control of significant fixed costs over the next few years to allow for better budgeting and managing cash.
6. CONSIDER DELAYING EXPANSIONS
During periods of economic uncertainty, some business owners may opt to delay major capital investments. However, depending on risk tolerance and industry, it may also be advantageous to invest more when the economy is weaker.
7. CONSULT WITH A FINANCIAL ADVISER
Don’t navigate these decisions alone. Enlist the expertise of a financial adviser who can provide a breadth of knowledge and resources to help identify the ideal strategies based on business goals, financial situation and risk tolerance.
MAINTAINING A BALANCED PERSPECTIVE
As the inflation rate rises, it can be easy to get caught up in a flurry of sensationalistic news headlines that provoke fear and anxiety about the future.
To help broaden perspective, keep in mind that the current inflationary period follows an extended period of uncharacteristically low inflation rates. And while the recent spike in inflation exceeds what we’ve grown accustomed to, it remains within a normal historical range.
Despite the escalating Russia-Ukraine conflict, there’s growing evidence to support the notion that inflation will begin to decline this year.
Many of the supply chain disruptions that have impacted everyone over the last two years will continue to improve as the pandemic eventually transitions into an endemic phase. The labor market is also likely to improve this year as more people reenter the workforce. Combined with the Federal Reserve’s actions, these developments are expected to benefit the economy and lower inflation.
In navigating this season of uncertainty, it’s important to maintain a broad-based view of the economic environment. Rely on diverse news and information sources for a balanced perspective on the economy rather than a narrow, backward-looking point of view.
It’s also helpful to connect with other business owners and seek out knowledgeable resources who can help you stay grounded and focused on the most important issues for your business.
The actions you take during this season of high inflation will help your company become more resilient and ready to successfully face future challenges.
David Navarro is the president for the Las Vegas Region at Enterprise Bank & Trust.