Inflation is a big deal. It’s a stealth tax that eats away at your profits and savings and can even cause you to lose customers. Inflation is a general rise in the price of goods and services over time. In other words, the same basket of groceries that cost $50 last year will cost you more this year than last 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 costs $55 this year, there’s been a 10% increase in inflation (5/50=0.10; 0.10+1=1.10).
Because markets are not homogeneous entities, consisting of identical buyers and sellers with equal information about price changes, inflation rates can vary across different regions and industries — sometimes significantly so.
Inflation is usually caused by an increase in the money supply without corresponding economic activity growth to justify it, as well as government intervention through fiscal policy (lower taxes) or monetary policy (lowering interest rates).
Inflation is when prices rise, which means you have to pay more for the same products and services. You can’t just sit back and wait for inflation to happen. Take action now to prepare your business for whatever happens next year. Let’s look at some ways to prepare your business for inflation.
Know how much your business will be affected
Think about your business’s needs. Inflation can be scary, but that doesn’t mean you should lose sleep over it. For some businesses, inflation will have only minor effects. Production costs are likely to increase if you manufacture goods domestically as you purchase raw materials and pay wages at higher rates. However, if you import most of your products from overseas or sell a service (rather than an actual good), inflation won’t impact your business model and growth as much.
Don’t make any major purchases right now
Luxuries like purchasing a new vehicle, pieces of commercial property or office equipment, inventory, software, or starting a new project aren’t the best idea when the economy is heating up. Likewise, hiring more staff or changing your pricing strategy probably won’t pay off right now. Hold off on making major purchases while inflation is rising.
Make sure you have enough inventory
Inflation makes it harder for companies to sell products because people don’t have as much money as they did before. However, it also makes it harder for companies to buy inventory because they don’t have as much money either. One way to avoid having to raise prices is to have plenty of inventory on hand, so you don’t get caught short by sudden spikes in demand or supply disruptions. The more inventory you have, the less likely that price increases will negatively affect sales, especially if they’re minimal.
Make sure your customers are protected
Obviously, you and your business need protection, but it’s important not to forget about the people who support your business. If you offer products or services necessary for life and livelihood, people will continue to buy from you even if they have to spend more money. If they don’t have the money, they might turn to lenders.
One way to help protect them is by offering financing options through your company so that you can keep track of their spending and ensure they aren’t racking up too much debt through another source. Another way to protect them is by lowering prices or offering discounts. This may take a toll on profits for a short period but will help build relationships with customers who will return the favor when inflation slows or stops completely.
In addition, these practices also work toward building loyalty among patrons who might otherwise find cheaper alternatives elsewhere, because those alternatives do not provide benefits like financing options and discounts (or at least not as many).
Cut your expenses
Inflation is difficult to predict with accuracy, but it’s still important to prepare your small business for the possibility of increasing costs in the future. The best way to do this on a budget is to cut your ongoing expenses as much as possible. This can include negotiating lower prices from vendors or suppliers, making sure all employees are working at maximum efficiency (or, in some cases reducing staff), or renting office space with less overhead.
Preparing for inflation doesn’t have to be expensive, but you should have a plan.
Negotiate with suppliers
The first step to preparing your business for inflation is negotiating with suppliers and vendors. If your vendor has a contract with a fixed price, it may not be possible to negotiate changes to the terms of the contract without giving up other benefits or services. However, you should still try to negotiate a better deal than what’s in their current contract. If you’re buying from multiple suppliers, try negotiating with them all at once. This will allow them to compete for your business and lower costs for everyone involved.
Set up an emergency fund
Set up an emergency fund: Inflation can be unpredictable; it might not just happen tomorrow, but several years from now, too. Having an emergency fund will allow you to weather unexpected increases in costs without going into debt or compromising on the quality of service or product offerings.
An emergency fund is an account set aside for unexpected expenses that can’t be paid with other funds. It’s best to keep this money in cash or in a high-yield savings account so that you can access it quickly without incurring large fees or interest charges.
How large should your emergency fund be? Well, that depends on your business, but experts recommend having at least six months’ worth of operating expenses set aside as part of your overall financial plan. This way, if something unforeseen happens, like a natural disaster or equipment failure, you’ll have enough money to cover costs until you receive payment from clients or customers.
The Bottom Line
You’ll safeguard yourself against losses and unexpected expenses by preparing your business for inflation. Keep these concerns in mind as you grow your business — make sure you’re using the right budgeting methods, developing contingencies for unexpected costs, and don’t be afraid to consult a financial expert if you’re unhappy with your current setup. There’s no guarantee that every business can successfully prepare itself for inflation, but by being smart, proactive, and learning from past mistakes, you’ll be more than ready to tackle inflation.
