2021 ended with inflation hitting an astonishing 7% rate – higher than it has been since the 1980s. There are few areas of life left untouched by rising costs. If you consume anything, you’ve felt the sticker shock.
Entrepreneurs and small business owners are particularly vulnerable to inflation. Often working with shoe-string budgets, a less established client base, and uncertain or fluctuating income, these innovators are left feeling the squeeze more than most.
So how do you protect your business, your money, and your livelihood from inflation?
7 Strategic Moves for Dealing with Inflation
1. Evaluate Nonstrategic Spending
When the budget tightens, you may find yourself slashing whatever expenses you can. Be careful! Your temptation will be to eliminate “non-essential” costs. Company coffee, bonuses, and small luxuries for your team. Make no mistake, these things are strategic spending. While on the surface they may seem unnecessary, they contribute to morale – which then influences productivity and employee retention.
Be mindful of how even small, “frivolous” expenses impact your company. You’re likely to find less obvious suspects that contribute far less – if anything – to building your company’s future.
2. Be Less Liquid
In times of inflation, your money is worth less. Buying power diminishes. Being liquid doesn’t help. When you keep cash or savings on hand, inflation eats into its worth. Instead of sitting on your money in times of inflation, put it to better use. Make purchases that will help push your business to the next level in terms of capacity and productivity. Invest so that you’re generating passive income. Don’t totally empty out your savings but focus on how you can add and grow value through other assets.
(And in case you forgot…real estate is a hedge against inflation!)
3. Review Your Business Finances
Go over your financials with a fine-tooth comb. Small, unassuming expenses can add up and you may find there’s more room to cut than you thought. Tough times may also demand sacrifice. Meet with a financial advisor to help you sort through your budget and see where you need to make some changes.
4. Watch the Competition
Inflation means you’re going to have to raise prices. That’s the nature of the inflation beast. You’ll want to carefully watch the competition to see when and how much their prices go up – and act accordingly and strategically. You’ll want to strike a balance between proper compensation for inflation and competitive pricing – that is, in line with or slightly below that of your competitors.
5. Cut Consumption
How can your company run more like a lean machine in these trying times? Take stock of your business to determine where you can reduce spending by reducing how much you buy. Maybe you don’t need the inventory that you have and some things are sitting unused. Even if you don’t entirely cut items from your budget, you may be able to effectively reduce the amount that you’re buying.
6. Review Your Supply Chain
Supply chain issues have been one of the biggest culprits for the 2021 inflation. These issues, of course, emerged in the wake of the pandemic. Between factory and production closures to the labor shortage, getting products and raw materials alike has been more challenging. This, of course, results in rising costs for you as demand remains high where supply depletes and slows.
Look at your current supply chain. Assess your current partners and investigate alternatives. You may find a better deal or, at the very least, reliable alternatives should a link in your chain break.
7. Run Stress Tests
Finally, you must determine what your operation can and cannot handle. Run some what-if scenarios and do calculations. These should be designed as stress tests that help you see where your business’ breaking points are and how you can counter them. Ask yourself what would happen if payroll costs increased by 20%, if supply chain problems reduced or slowed your revenue, or if the cost of your essential materials jumps even higher.
Once you know what your business can and cannot handle, you can better develop defenses and alternatives to prevent disaster. You’ll likely find that you can manage and reduce the potential risks.
