Business Strategies for an Inflationary Environment
Now that the COVID Pandemic lockdowns and re-openings are in the past, we can start assessing the after-effects of the policies that were instituted as a reaction to the crisis. Whether or not all economists are in agreement regarding the causes, it appears there is agreement on the fact that we have entered an inflationary environment. This is going to prove just as challenging to manage a business in as the COVID Pandemic situation was these past two years. Recent information indicates that this bout of inflation is not going to be transitory, rather we are projected to have substantial inflation for some time to come. The effects of an inflationary environment are not felt evenly throughout the economy, so it will be to your benefit to keep an eye on your business and the effects inflation will have on your profitability and costs. Large-group statistics may not tell the story for your individual company.
This article is a synthesis of thoughts on inflation, some literature research, and some information gleaned from first-hand observations of the actions and decisions that businesses are making around the Southern Oregon region. It has become evident to me that the businesses which are able to best navigate the inflation challenges are those which are prepared to survive and are not those locked in a reactive state of disarray.
It is said that inflation acts like a tax to businesses, but I look at it as more of a stealth event by taking momentum, resources, energy and margin without providing any return. It can be a silent killer of commerce and certainly limits business functionality and growth potential. Inflation creeps into business operations through three principal avenues: finance, operations and personnel.
With respect to finance, inflation’s effects can be:
Destructive to your margins. Margins are what a business lives and dies by. In an environment where margins shrink, profitability follows. The only manner to measure the effects of shrinking margins is to have the cost and revenue data from previous periods in hand to compare to today’s results. Drawing comparisons between like periods is effective to understand the amount of shrink taking place.
The official inflation rate published does your business no good to use as a reference for making decisions. Your experience with inflationary forces is unique based on a number of factors specific to your industry and business and could substantially differ from published data.
Knowing your ‘baseline’ data and comparing it is effective, IF YOU HAVE IT to use. If you have not followed best practices to benchmark your business and understand your numbers, then using a data-driven rational process to determine costs and appropriate responses to inflationary forces will be unavailable to you.
Keeping a sharp eye out for changes or increases of your Accounts Receivable numbers is critical. Erosion in these numbers, meaning longer repayment timeframes or increasing reliance of your clients to use extended payment terms can indicate trouble brewing. Your customers’ weaknesses can easily become your own.
Conversely, extending your payment terms to your suppliers is a great way to keep your costs down, if it is available to you.
Lastly, look at your debt structure. Are you extending out your repayment of existing debt as much as you can? The idea is to extend the term of the debt so that you can repay the debt with inflation adjusted dollars. If you are not carrying debt, it may be a good time to look at taking some debt on to increase your available cash and to borrow now, assuming rates will continue to rise until inflation is tamed.
With respect to operations, inflation’s effects can be mitigated through:
Maintaining your supply chain with reinforcing the relationships that have been developed over time. Supply chain interruptions can cause major cost overruns and increases, and greatly reduced profitability. I reference the disruptions the semiconductor shortage has caused Ford and Chevrolet in business continuity in their truck lines.
Cultivating additional suppliers for identical components can be effective for avoiding interruptions to your business. Alternatively, consider making your own components to avoid relying on interruptible supply chains.
Lean your inventories and processes. Lean processes can give you efficiency gains that are measurable in (retained) dollars.
Client relationships are critical to maintaining your business volumes, especially critical during inflationary times. Investing in those relationships is cheaper than finding new clients.
Articulate and communicate your Value Proposition to your clients, prospects and employees. Educate your team to understand your Value Proposition and own it. High-touch communication of the value you deliver can help mitigate the ill will generated by necessary price increases.
Consider suspending Just-in-Time inventory stocking levels. Inflation stretches supply chains with increased lead times necessary, and oftentimes volatile pricing dynamics ensue. JIT can exacerbate supply chain woes.
With respect to your employees:
Retain your trained productive employees. If you have kept a good set of financial statements, the value of retaining employees versus the costs involved with acquiring and training new employees can be determined. You may be able to generate data to confirm it is cheaper to retain your productive workforce, while compensating them for their loyalty and best efforts.
The recommendations in this article are not the only reasonable precautions and actions a business can take to improve their position in inflationary times. Inflation causes instability and uncertainty, which after the last couple years of continuous changed experienced by businesses, is going to prove very challenging to survive. In many cases, larger businesses have had competitive advantages over small businesses during the Pandemic years, and this will continue through inflationary times as well. Look at your industry and identify some of the larger players. What are they doing that makes them bigger than you are? What can you learn from how they operate, where their markets are, and how they transact business for nuggets of information. Then build programs and products around what you have learned and go out and attack the markets to disrupt them in your favor. There are no rules requiring you to wait for inflation to harm your business. You have the ability to be proactive to create your own opportunities, and this strategy in inflationary times can tip the scale in your favor.
Marshall Doak is the Director of the Southern Oregon University Small Business Development Center and a huge supporter of innovation and the community that forms around innovation in the economy. In private practice, he works with businesses that plan to transition to new ownership within the next five years, assisting them to build value that can be converted to retirement income when the business sells. He can be reached through: email@example.com or 541-646-4126.