Inflation, What are Our Options?
Updated: Sep 20, 2022
Almost every business, at one time or another, finds the dilemma of being in an inflationary cycle. Companies cannot control the economy but can take precautionary steps, so the economy does not completely control the business. Businesses find that they get confronted in two different ways regarding inflation. On one side, their operating costs are increasing. On the other, they are contending with rising 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. Companies should consider the following defensive measures:
· Work with suppliers – Suppliers understand the businesses they
deal with and want their customers to be successful and buy more. In an inflationary cycle, companies should talk to their vendors about pricing and payment terms and what concessions can get made for this recession.
· Have alternate suppliers – Businesses should constantly be researching and making contacts with other than current suppliers. A business never knows when one of its significant suppliers might have supply chain problems, quality issues, or delivery disruptions. Therefore, alternative solutions are a good business practice and give the company resources to meet customer demand. In addition, during inflation, these alternate suppliers can get 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 each product or service produces for the industry is essential when ordering inventory.
· Remote workforce – Depending on the business, transitioning to a partial or complete remote workforce can help lower operating expenses. But, of course, any costs associated with employees working remotely (computers, printers, Internet, etc.) must be factored into the cost-benefit analysis before any decision gets made.
· Technology and automation – Technological advances to equipment and new software are continuously coming onto the market. Businesses should investigate what is available regarding their specific needs and if new equipment and 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. To lower costs, a business could reduce hours if necessary to avoid layoffs. In addition, to keep employees loyal and motivated during a slowdown, the company could increase employee perks that result in very little or no cost. These perks could include 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 become prepared for an inflationary cycle. However, companies must contend with increased customer pricing and how that gets handled so customers do not get driven to the competition.
· Pricing, competition, and value – These three items go together. A business must consider what it charges for its products and services. Pricing must be in line with competitors for the same relative value of products and services. Surveying of the competition should be ongoing.
· Outperforming the competition – Although pricing might be competitive, a business beats its competition by being better 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. Customers will gravitate to the lowest price when all factors are relatively the same. 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 become prepared for an inflationary cycle. The company's employees and customers should be the business's focus. The reality is that the business's finances are like the blood that flows in your body. It supplies the heart with what it needs to beat. So the balance becomes understanding the company finances without losing sight of the most valuable source of the business, the employees, and the customers in that order. They are both necessary ingredients for a successful, profitable business.
Businesses must keep their best, talented employees while outperforming their competitors externally. Therefore, employee retention should be the goal of any business anytime and is increasingly more critical when inflation gets thrown into the mix of everyday business issues. So be prepared and work diligently to overcome the adverse effects of inflation.