How To Protect Your Business From Inflation

Rising prices have been making headlines and forcing business owners to make tough decisions.  According to the Department of Labor, inflation rose 7.5% in January 2022, the highest rate in 40 years. Although everyone has felt the effects of inflation in recent months small businesses owners often bear the brunt of inflation’s impacts.  Inflation can affect many parts of your business from profitability to customer satisfaction.  It has been difficult to manufacture certain products because of the supply chain issues caused by the pandemic; now with inflation costs, it is making it even harder for businesses to get the products they need to manufacture.  This causes inventory delays and problems.  If you don’t have the inventory, you cannot supply your customers!  With inflation, you also have increased expenses which affect your bottom line.  You need to raise your prices, but fear that doing so will push some customers away.  This is a problem for all businesses but we have a few strategies to help you protect your business during this time of inflation.

One of the most important things you can do during this time is to create a financial forecast.  This can help you figure out a lot!  This is an important thing to do on a quarterly basis as it allows you to look at different scenarios so you are prepared for the ‘what-if’.  By forecasting, you can see where you can cut costs a bit to help you stay afloat.  Once you are able to forecast different scenarios it can help you with these other strategies.

Being able to adapt is very important during an inflation period.  As a business owner your short and long term plans should be able to adapt quickly when needed.  You may think that raising prices might be the first option to consider, but there are others. For example, if a company offers discounts for early payments, that can free up working capital. Those funds can then be used to negotiate better prices on inventory and materials, or fund new products and innovations.  You may have to raise prices, however, this may help you keep a good cash flow and stay profitable.

During an inflation period, reducing expenses and controlling your spending is crucial.  First you will need to consider where you are spending the most of your money.  Then think if it is something you are happy investing in, or do you need to cut it.  One way to look into cutting costs is to address if there are jobs that can be eliminated or restructured for major cost savings.  But remember that you should never cut strong talent.  Good employees are hard to find and even harder to train and keep.  Another way is to look at lowering your overhead and variable expenses.  This could be cutting costs on underutilized subscriptions, stopping auto pay so that you can control timing of payments and cutting initiatives that are not one of your core functions or that are underperforming.

Maintaining business relationships is another important strategy to consider.  Securing the inventory your business needs to operate is one of the most important ways to protect your business from the harshest of inflation’s impacts. This requires some extra effort on your part to communicate with your suppliers so you can get a sense of what products are in highest demand. It is a good idea to expand your network so that you have sourcing options when supply chain issues inevitably impact your inventory. Building out your network does require extra time and effort in the short-term, but will be extremely useful and save you time and stress in the future.

Inflation will not last forever.  But it is important to take the necessary steps to try to help your business stay afloat during this trying time.  If you have concerns or questions, reach out to your accountant today!