Inflation is a significant issue. It’s a hidden tax that eats into your profits and savings, and can even drive customers away. Inflation is the gradual increase in the price of goods and services. To put it another way, the same grocery basket that cost $50 last year will cost you more this year.
The CPI, or Consumer Price Index, measures inflation. You calculate it by subtracting the price of a basket of goods from one year to the next and measuring the change in cost percentage-wise. For example, if your $50 basket of groceries cost $55 this year, there’s been a 10% increase in inflation (5/50=0.10;0.10+1=1.10).
Inflation rates can range widely among locations and industries because markets are not homogeneous entities consisting of similar customers and sellers with equivalent information about price changes.
Inflation is usually generated by an increase in the money supply without equivalent expansion in economic activity, as well as government intervention through fiscal policy (lower taxes) or monetary policy (lower interest rates) (lowering interest rates).
Inflation occurs when prices increase, requiring you to pay more for the same goods and services. You cannot simply sit back and wait for inflation to occur. Take steps now to prepare your company for whatever the coming year may bring. Let’s take a look at some strategies for preparing your company for inflation.
- Know how much your local business will be affected
Consider your company’s needs. Inflation can be frightening, but it doesn’t have to keep you awake at night. Inflation will have a very small influence on some businesses. If you make things domestically, your production costs are likely to rise as you purchase more raw materials and pay greater labor. Inflation will have less of an impact on your company strategy and growth if you import most of your products from overseas or sell a service (rather than a physical good).
- Make sure you have enough inventory
When the economy is heating up, luxuries like buying a new automobile, commercial property or office equipment, inventory, software, or starting a new project aren’t the best choice. Similarly, adding more employees or modifying your pricing approach aren’t likely to pay you right now. When inflation is rising, it’s best to put off significant purchases.
- Don’t make any major purchases right now
Because people do not have as much money as they did previously, inflation makes it more difficult for businesses to sell their products. However, because organizations don’t have as much money as individuals, it makes it more difficult for them to purchase inventory. Having enough inventory on hand to avoid being caught short by sudden increases in demand or supply disruptions is one strategy to avoid having to raise prices. The more inventory you have, the less likely it is that price hikes would hurt sales, especially if they are minor.
- Make sure you have enough inventory
Companies have a harder time selling things when people don’t have as much money as they used to. But it makes it harder for businesses to buy stock because they don’t have as much money. One way to avoid having to raise prices is to keep a lot of inventory on hand, so that sudden increases in demand or problems with the supply chain don’t leave you short. Price increases are less likely to hurt sales if you have a lot of inventory, especially if the price increases are small.
- Make sure your customers are protected
You and your business need protection, but don’t forget about the people who help you run your business. People will keep buying from you even if they have to pay more for the things or services they need to live and make a living. If they don’t have enough money, they might borrow it.
You can help protect them by giving them financing options through your business. This way, you can keep track of how much they spend and make sure they aren’t taking on too much debt from other sources. One more way to keep them safe is to lower prices or give discounts. This might hurt profits for a short time, but it will help build relationships with customers who will pay you back when inflation slows down or stops.
Also, these practices make customers more loyal, even if they could find cheaper options elsewhere. This is because cheaper options don’t offer benefits like financing options and discounts (or at least not as many).
- Cut your expenses
Even though inflation is hard to predict, it’s still important for your small business to be ready for the possibility that costs will go up in the future. The best way to do this on a limited budget is to cut as many of your regular expenses as you can. This can be done by negotiating lower prices with vendors or suppliers, making sure all employees are working as efficiently as possible (or, in some cases, cutting staff), or renting office space with less overhead.
You don’t have to spend a lot of money to prepare for inflation, but you should have a plan.
- Negotiate with suppliers
The first thing you need to do to get your business ready for inflation is to talk with your suppliers and vendors. If your vendor has a contract with a fixed price, it may not be possible to change the terms of the contract without giving up other benefits or services. But you should still try to negotiate a better deal than what’s in their contract. Try negotiating with all of your suppliers at once if you are buying from more than one. This will give them a chance to compete for your business and keep costs down for everyone.
- Set up an emergency fund
Set up an emergency fund. Inflation can be hard to predict; it could happen not just tomorrow but also in a few years. If you have an emergency fund, you can handle sudden price hikes without going into debt or lowering the quality of the service or product you offer.
An emergency fund is a savings account set up for expenses that come up out of the blue and can’t be paid for with other money. It’s best to keep this money in cash or in a high-yield savings account so that you can get to it quickly without having to pay a lot in fees or interest.
How big should your fund for emergencies be? Well, that depends on your business, but experts say that as part of your overall financial plan, you should save up at least six months’ worth of operating costs. So, if something unexpected happens, like a natural disaster or a piece of equipment breaking down, you’ll have enough money to cover costs until clients or customers pay you.
The Bottom Line
By preparing your business for inflation, you’ll protect yourself from losses and costs you didn’t expect. As your business grows, keep these things in mind: make sure you’re using the right budgeting methods, planning for unexpected costs, and don’t be afraid to talk to a financial expert if you don’t like how things are going. There’s no guarantee that every business can prepare for inflation successfully, but if you’re smart, take action, and learn from your mistakes, you’ll be more than ready to deal with inflation.