How to Protect Your Business from Inflation
With the slow revival of
the economy from the pandemic, economists are predicting inflation in the near
future. After the $1.9 trillion pandemic package, inflation alarms are blaring.
With so much money in the system, it could increase costs, disrupt supply
chains, and cause a labor shortage.
High inflation will
cause irreversible damage to your business. You could be looking at plummeting
profits and valuations. How can you prepare for it? This article will attempt
to answer just that.
How to manage
The first step in
managing inflation is to forecast what could happen. Predict things like the
period of inflation, how long will it last? While it could not be as accurate,
it is better than no forecast. After formulating a forecast, here are some
steps to take to protect your business from possible inflation.
- Review
your contracts. Look through the existing contracts you have and identify
good quality suppliers, renegotiate with them for extended long-term
fixed-price agreements. Don’t agree on inflation rate adjustments. Review
your customer contracts to make sure you have the ability to change prices
and be able to pass on any increase in cost.
- Plan
your price increases. Now that there is some money in the flow, it gives
you the ability to increase your prices. But consider moderate increases
and spread out to every 6th month or so.
- While
you’re at it consider revitalizing your customer service. Don’t give your
clients a reason to price-shop. Give them a reason to stay. Investing in
good customer service while the pandemic is ongoing could be a
cost-efficient strategy to retain market share.
- Fix
any collection issues while we are still anticipating the inflation and
it’s still not here. When it does arrive, customers will be asking you to
stretch out terms
- Create
a flexible pool of employees consisting of full-time and contingent
workers. This will prepare you for future pressure from competitive labor
costs.
- If
you need to borrow money, do it now. Consider getting loans now that rates
are still low. Also because in inflation the value of the dollar drops. If
you borrow now and pay later, your debt could become cheaper while the
inflation is high.
- If
you need to spend on any necessary cost, consider going for those with
longer contract terms whose prices could drop after the inflation.
- Consistent
application of recording costs by project or customer. A consistent
application will yield you more accurate books from which you can base
your forecasts and next course of action.
- Keep
current books. When your books are updated, data for your forecast or
planning will be more accurate. It’s better to assign a cost as it accrues
rather than try and remember the nature of the expense a week or a month
after it has been spent. The same goes for billing and recording revenue.
If you don’t record sales promptly, you run the risk of forgetting about
them.
- Review
accounting reports regularly. Doing so will enable you to identify the
lowest-margin customer. Regular review will present trends that will
eventually help control profit margins.
Remember that you need
to be careful enough to cut costs while not sacrificing quality. Because if you
lose demand, you might survive the inflation but you will meet your end. It is
important to watch your price elasticity. You have to plan and space out your
price increases, with the right balance, you could protect your margins without
losing demand.