You know that inflation impacts your business. You can see it in the rising material and labor costs. But while inflation is unavoidable, how much do you allow it to control your business transactions or bottom line? If you find your business at the mercy of rising inflation rates, you need to take a more proactive approach to your finances.
The Current State of Inflation (Hint: It’s Not Pretty)
As of late November 2021, the state of inflation in the United States wasn’t exactly optimistic. According to Pew Research, the annual rate of inflation hit 6.2% in October 2021, the highest rate in more than 30 years. The only countries in the world that have seen a comparable increase in inflation are Brazil and Turkey, according to data on 2019 and 2021 comparisons. The change has been blamed on supply chain disruptions, unsettled labor markets, consumer demand, and the Covid-19 pandemic in general.
What Does this Mean for Your Business’s Finances?
According to CNBC, businesses and individuals alike can expect recent high inflation to impact purchasing power and investments. Beyond your newly increased costs for products, services and materials, you’ll also potentially deal with increased requests from your workforce—as employees want to see their paychecks rise as well to meet increasing consumer costs. This creates a trickle effect that you may already be noticing, as these requests from employees may turn into resignations, when unsatisfied workers look elsewhere for a better paycheck. You may try to remedy these effects by raising rates or prices, but then you could see a dip in consumer or client spending, making it even more difficult for your business to deal with its own costs, whether those are inventory or labor.
So, what’s a business owner or manager to do? We have a few ideas.
How to Proactively Prepare for Inflation
While dealing with the current inflation levels may feel impossible, you can make positive changes now to proactively prepare for future inflation. These changes aren’t only positive in that they protect your company’s bottom line later, but they can also reveal hidden areas where your organization could stand to be more profitable. Here are the changes that the experts at publications such as Harvard Business Review, USA Today and Yahoo Finance suggest.
1. Increase Your Spending Visibility
Increasing your spending visibility is important not only for you as a leader, but also for your entire management team. You want to show, in high detail, where your business’s money is going, how it’s going there, and why. This not only provides you with accountability throughout your organization’s entire spending chain, but also valuable data about your company’s cash flow.
2. Use Data to Approach Your Spending Strategically
Once you have data on your company’s spending, you can then use it to spend strategically. Consider where you are spending the most. Is that the area where you want to be most invested or is it something you can cut? What are the areas of spending that you definitely don’t want to cut, at any cost? What is yielding the highest ROI, as well as the lowest?
Look at all that data and use it to empower your team to make smart decisions that will improve your company now, and protect it in the future.
3. Eliminate Work and Consumption Costs
No, we’re not saying to let go of half your staff or cut your offered signature services that clients have come to rely on. Instead, look at how your business works and consumes, and then make smarter decisions as to how those methods can be fine-tuned.
Maybe there are processes and systems that can be automated or even eliminated completely. Harvard Business Review found that automation specifically helps businesses and organizations become more stable, and companies that invested in automation before the pandemic weathered the subsequent challenges much more efficiently.
Yahoo Finance encourages business owners to ask: Is it possible to source raw materials elsewhere for a better deal? Can you set up a contract with a fixed rate to protect against increases in the near future? Is there any tolerance for adjusting your wages bill? Your answers will help determine where you can potentially cut consumption costs.
4. Pick Inflation-Proof Business Investments
A time of inflation is not the time for your business to rely on a horde of cash that’s losing its value every second of the day. Inflation-proof your business by using that cash to make investments that won’t necessarily degrade with future inflation. Think value-heavy equipment and resources. Invest in real estate. USA Today’s top inflation-proof investments include Treasury Inflation-Protected Securities, gold, commodities, real estate, and money market mutual funds.
5. Diversify into Non-Inflated Economies
Consider diversifying your investments and strategies to include markets and economies that typically go unaffected by inflation in the U.S. market. These economies, according to Yahoo Finance, often include those in Australia, South Korea, and Italy. If your company is able, you can set up some of your operations overseas, invest in foreign bonds, and/or negotiate foreign deals for fixed rates in U.S. dollars.
The Bottom Line
If you find your business at the mercy of rising inflation rates, you need to take a more proactive approach to your finances. Make positive changes now to protect your company’s bottom line and reveal areas where your organization could be more profitable.
Whatever you’re up against in your business, if you need assistance, Arootah’s Business Advisory team can help. We work with you to better identify where your organization has room for financial improvement, and then help put together a plan so you and your team can reach your ideal state. With time-tested proven formulas and methods, we know how to take your business from surviving to thriving!
Check out our Business Advisory services today and let’s talk business so that your company’s bottom line is protected, no matter what financial challenges lie ahead.