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Strategies for Business Owners in an Inflationary Environment

Even with the best strategic planning and forecasting, no one could have predicted the economic ups and downs of the past few years. As the economy comes weaving back from the pandemic, finance and accounting leadership is faced with the rising costs associated with inflation, a looming threat of recession, and continued (though lessening) supply chain issues.

The world was never “normal” so getting back to that state is impractical at the very least. So, what is a business owner to do to prepare for an uncertain future?

According to a recent analysis by Deloitte, the gross domestic product in the United States is poised to boom well beyond pre-pandemic numbers. What do a higher GDP, increased inflation, a recession, and falling unemployment numbers mean for business owners? Let’s explore:

What is Inflation and How Does it Affect Your Business?

Inflation is an economic environment in which the cost of goods and services increases rapidly. Inflation can be triggered by a shortage of services or products; this, in turn, leads to increased prices which trigger a cycle of rising costs, short supply, and long wait times, making it harder for businesses to keep margins profitable.

Forbes has a straightforward definition of inflation. “Inflation is identified by a rise in prices and a decline in the currency’s purchasing power over time.”

Reduced purchasing power means that businesses will have fewer products to sell, potentially lowering profits. Lower profits can mean a decreased ability to grow or invest back into the business.

As many companies with fewer than 500 employees were founded using the owner’s savings, inflation fallout puts small business owners at significant personal, as well as corporate, financial risk.

Effects of Inflation on Small to Medium Size Businesses

Being knowledgeable and prepared is the best defense in cases of economic uncertainty. Business owners and finance and accounting leaders need to consider the following three elements concerning inflation and the surrounding economic environment.

Erosion of Purchasing Power

Inflation negatively impacts the purchasing power of a currency as prices of goods and services go up. Historically, prices go up quickly during inflation but come back down much more slowly.

Shortages of Finished Products in the Market

The effects of inflation are not linear; they ripple through an economy affecting businesses in unexpected ways. One of the most immediate impacts is the shortage of supplies preventing the completion of finished goods.

When manufacturers are unable to get the raw materials they need to produce finished products, the impacts are far-reaching. While Just In Time (JIT) manufacturing was developed to address this problem, the inter-connected market leaves many entrepreneurs’ funds tied up in inventory-in-process, accumulating losses and driving demand and prices higher.

Inflation Raises the Cost of Borrowing

During periods of inflation, the cost of money goes up. In these periods, banks raise the criteria to qualify for loans just as business owners find themselves strapped for cash. The age-old conundrum is exacerbated in an inflationary environment, when you most need a loan most, you are least qualified to get one.

As a business owner, it may be beneficial to consider alternative lenders during a time when sourcing a bank loan may be challenging. Talk with your banker, CPA, financial advisor, or outsourced accounting experts to find out what options might be available.

How Businesses Can Manage Post-Pandemic Inflation

No matter what industry you are in, your business must make well-informed strategic decisions in a time of inflation. Here are five steps your business can take to mitigate the effects of inflation in 2022.

Evaluate Product Revenue Mix

Analyze product or service streams, compare performance over time, and consider different geographical markets, client types, and distribution channels.

Now is the time to streamline your business, cut costs, and improve margins. You may need to shift production to focus on higher-margin products and services.

Analyzing the potential short and long-term effects of the shift and understanding how it will affect the future of the business is essential before making these kinds of seismic shifts. Be proactive, thoughtful, and strategic, not reactive.

Adjust Your Pricing

The prices of almost every product go up during inflation. Your business may have to raise prices to stay in alignment with the rising costs in the market.

Before increasing prices, analyze the competition, be upfront with customers about increases and why they are necessary, and be clear on your long-term goals for returning prices to their pre-inflationary rates or accepting the new status quo.

Transparency will help customers adapt to the new pricing without negatively impacting their loyalty to the business.

Evaluate Risks to Your Supply Chain

Over the last few years, business owners have seen the effects of having their supply chain solely dependent on one supplier. When imports were halted due to the ongoing pandemic, business owners couldn’t keep up with demand. The result? Revealing the faults in many business owners’ supply chain strategy.

These events forced business owners to start strategically assessing the risk of their supply chain. Some of these risks can include:

  • Over-dependence on a single supplier
  • Using long-lead-time suppliers, such as importers
  • Heavy, bulky, hazardous, or perishable products that are hard to store
  • Materials that are passed through a JIT supply chain

There are steps you can take to mitigate supply chain-related risks in your business in a time of inflation, including:

  • Setting up an alternate supply chain – not merely finding an alternate supplier
  • Stockpiling critical supplies that have a low holding cost
  • Putting in place an expedited supply strategy
  • Reviewing stock levels at every stage of the JIT supply chain

Understand Your Inventory

When prices start going up, a robust inventory can be a competitive advantage. By the same principle, it is a better policy to maintain lower inventory when prices are low.

Understanding your inventory and keeping it in line with market demand will help you maximize profitability. It also helps to improve internal accounting control, business oversight, and inventory management processes so the data you rely upon to make those critical business decisions is accurate, relevant, and timely.

Cash Flow Management is King!

If your business engages in proactive scenario planning and forecasting, you will have a worst-case scenario plan at the ready. This scenario planning can help you anticipate wage increases, higher material prices, or unforeseen disruptions in the supply chain. A well-executed financial forecast addresses the amount of cash on hand your business needs to get through economic fluctuations.

They say, “Cash is king”, so do your best to keep cash available, have a strong banking partnership in place, and take steps to mitigate cash-flow risks. Beware of customers who use your business as a bank. Especially in inflationary environments, unpaid AR adds risks to a business if those receivables become uncollectible.

Read More: 10 Tips To Help Improve Your Company’s Cash Flow

Prepare your Business for Success

Regardless of the economic environment, a well-run business needs efficient accounting systems and processes to drive greater visibility into its financials. With accurate and reliable data, you can act fast and stay ahead of the competition. The real question is, do you know your numbers?

No matter your industry, you need a solid financial and operational strategy to evaluate the risks to your business and put measures in place to minimize them. Contact Signature Analytics and let us help you create and implement a successful accounting and financial strategy to help drive your company forward regardless of the economic times.


 

Do you know your numbers?