How Does Inflation Affect a Business?
Market analysts everywhere are discussing the impacts of inflation. As we head into bear market territory, this presents both a risk and an opportunity for business leaders. It’s true that rising costs and inflationary risk undermine a business or individual’s purchasing power over time. A growing concern for many business leaders in 2022 is how to deal with these risings costs.
Consider this finding from a recent Forbes article:
Our research found that 77% of risk leaders believe that complex new risks are emerging at a more rapid pace than ever before. One of those risks is inflation, which is moving to the top of a long list of issues facing businesses in 2022. In just a year, the U.S. annual consumer price inflation rate has increased from 1.4% to the 7% range and has become a significant concern for most companies.
How Does Inflation Affect a Business?
First, to deliver adequate solutions we must address how inflation affects businesses on the ground. Labor wages are the most obvious place to start. When purchasing power balloons out of control due to an influx of spending or governmental stimulus, it is harder for employers to keep up with these rate hikes. In addition, employers, often feel the pinch, leading them to make cuts to their workforce that can lead to a downturn in profits. With supply and demand ratios turned upside down, businesses struggle to hang onto their profit margins.
Finding solutions to America’s inflation crisis requires perseverance and a little creativity. And while business owners can’t control future economic forecasts, there are some creative solutions to ease the negative impacts of inflation on your business.
5 Ways to Start Preparing For Inflation
1. Rethink your shipping costs and find ways to source locally if possible.
It’s no secret that the cost of gas is going up. This will have impacts on transportation and the availability of raw materials for business owners. Virtually every industry is impacted by a hike in inflation, whether by supply chain disruptions, the soaring cost of goods and services, or the low investor confidence in commodities markets. Being overly dependent on a specific supplier is another risk. Sourcing locally ensures a more stable procurement channel and can potentially save your business thousands of dollars. The added bonus is that it keeps money within your region instead of paying overseas companies The less susceptible your company is to a bottleneck while waiting on an imported product— the better.
Stockpiling critical supplies might also be crucial as your business forecasts supply chain disruptions. If these products have a low holding cost, you might consider buying and storing surplus as part of your strategy. Imports are a market especially vulnerable to rising transportation costs, specifically when global markets are unstable. Seek to build new connections with suppliers located within the U.S. if you are able.
2. Get visibility on your spending.
Now is a good time to have greater intelligence on your financial positioning. Knowing where money is moving, your cash flow outlook, having visibility on your debts, and understanding where you are vulnerable to risk or disruption is not underrated. A financial professional may have some strategically valuable ideas for how your industry might pivot in the face of inflation. While we can’t change the economy, there is always something within our grasp we can control and that is how money is being spent. Having visibility on money coming in and going out is massively important for every business owner. It also shows you the areas where you can afford to take risks, invest or borrow for new equipment, or perhaps cut back on spending. This crucial analysis is essential for surviving times of inflation.
3. Automate what aspects of your business you can.
Automation can cut down on labor costs and address inefficiencies in supply chains and business processes. While inflation isn’t a particularly inspiring reason to move toward automation, for most industries, it’s necessary. Are there technologies you can bring onboard quickly that will help alleviate some of the pressures on your business financially? Outdated legacy processes like shuffling paper around when there are electronic options available is a good place to start. It also makes the business more resilient in the face of swift changes in the market.
Look for solutions to existing problems you might have been dealing with for years. Ask your staff what problems are plaguing your supply chain most. And lastly, consider the onboarding time it takes to minimize disruptions to business operations as you integrate the solution into existing systems. Look for an automation provider that will have a support team dedicated exclusively to helping you through this transition.
4. Adjust your business model until you are able to staff fully, and hang onto loyal customers.
This is a tough one, as we understand how businesses continue to struggle with labor market shortages. Introducing limitations to your business hours of operation might not be desirable for every business, but it does present an effective solution to the problem of staffing shortages. We know how the staffing crisis can have unintended consequences for our business—especially when loyal customers have inconsistent experiences with your business or brand. It is always important to have good communication with customers by preparing them for what changes lie ahead.
In the midst of any transition, it's important to renew your commitment to exceptional customer service. If your customers are paying a higher premium for your product and services from inflation, ensure they are getting the same or better value. Sometimes it's a matter of making adjustments to your existing business model until you are able to enlist more help. Adjusting hours of opening and staffing to operate with limited capacity is sometimes necessary to adjust to this season of business. Others have leaned heavily on eCommerce as a way to circumvent some of this staffing crunch.
5. Invest in higher-margin products and services to bolster your bottom line
It’s no secret that the products that cost less to produce and secure a higher profit margin are a winning strategy during times of inflation. So it’s worth taking a second look at your current offerings and what products you might be willing to cut loose in favor of more profitable markets. Companies that shifted rapidly in response to the pandemic are those that have seen a payoff in making transitions on the fly. Consider what services or products you can scale quickly and predictably. Focus on what can help you make up for the revenue shortfall caused by inflation.
Top Features of Inflation Proof Businesses
Price hikes happen in a rapidly inflationary market and they are particularly noticeable for consumer goods that customers are used to paying only a certain amount for. If you work in a service-related industry, however, adjusting product pricing for inflation is easier. Try and find ways to sell on value rather than price.
An inflation-proof business knows how to listen. Are there ways to improve your brand in the eyes of the consumer? What value-added features of your business are worth paying extra for? The answer to both of these questions resides with your customer. Consider surveying and researching your ideal clients and what they care about today. Gaining an accurate understanding of your customer is the solution to many business challenges leaders face. Spend some time with your customers. Talk to them in person if possible, and get eyes on what they care about.
Saving through your good years is yet another great strategy to inflation-proof your business. While this is not something you can do now if you haven’t already started, you can consider adjusting output and production to higher levels to counter the effects of inflation. This requires making production pipelines run leaner and more efficiently. Do you need to hire more for that change? Make the investment. Do you need a better piece of equipment to boost output? Purchase it.
As these changes are ongoing, it is important to check in with how your team is doing. What’s working, and what’s not? And more importantly, pay attention to staffing retention rates. If people are quitting en masse, dig in until you discover the problem. If they are being overworked, prioritize working conditions over profit at all costs! Happy people deliver products that last. Happy people secure the future of your company. Cutting corners and working people into the ground is not a solution to inflation. Period.
Steps Every Business Can Take to Hedge Against Inflation
While preparing for inflation, changing your pricing structure is sometimes inevitable. This does not, however, need to be a negative experience for your customer, despite the fact that they are paying more. Consider how else you might offer them more benefit to buying your product! Focus on your differentiation from the competition. Key into the thing they are most likely to buy from you and capitalize on it.
You might also reconsider how you are marketing the cost of your product. Instead of focusing on the overall purchase price, consider introducing a price per unit structure that helps the customer grasp what they are getting per mile, per month, or per segment of the service offered. This will help take some of the negative attention off the dollar amount increase.
Lastly, it’s important not to stress about customers you might lose. It is inevitable that certain customers will turn away at any adjustment to costs introduced by inflation. However, it is less likely to happen based on the fact that these same customers will have experienced price hikes across the board while buying products in other industries.
The best you can do is find strategic and creative ways to try and create value in the shortfall your business will experience with inflation. Lean into the data you have to see things coming, but don’t obsess about what you can’t change. If the market is experiencing hardship, one good piece of news is that you aren’t the only one experiencing it!
In some cases, a business owner might even have to lower the prices of certain products during inflation to adjust to the market stressors of new competition or a product’s value that’s dropping due to some other disruption. If dropping the price makes the difference between surviving a downturn or not, this is crucial. Read the signs and translate what they are saying as best you can. If you receive a consistent downturn in customers you ordinarily do business with, investigate why that is happening and be prepared to act.
Business Growth Guidance During Uncertain Times
A business growth consultancy can assist companies with handling change in a time of inflation. By evaluating your current mix of products and services, they help business owners identify what opportunities and strategies might afford them better positioning in the market. Pointing out blind spots, navigating change with big leadership transitions, and increasing profitability are all squarely within the services of business growth consultants. If you’ve considered doing something different with your business but can’t identify what change you need, maybe it’s time to enlist the help of an expert in your industry.
