6 Smart Strategies To Manage Your Business During Inflationary Times
The giant inflationary red flag is putting a damper on any economic good news these days. Combine rising prices with lack of labor, and we have a real business challenge brewing. Most business managers of the last 20 years have little experience with managing businesses or farms during inflationary times. Below are six strategies for business managers to implement during inflationary times.
The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment.
U.S. Inflation Rate At Over 6-Year High
The inflation rate in the US increased to 2.8 percent in May of 2018 from 2.5 percent in April, beating market forecasts of 2.7 percent. It is the highest inflation rate since February of 2012, mainly due to rising prices for gasoline and shelter.
Large businesses more easily adapt to inflation. Inflation can be offset with economies of scale or straight price increases. In competitive markets, smaller businesses are reluctant to raise prices when they already see business tailing off due to inflation.
Cash Is King
Cash is a critical success factor for small businesses during inflationary times. It is challenging to keep chasing inflation with price increases. You find yourself always catching up. This pounds down your margins and makes it tougher to pay the bills. It is crucial to build cash reserves to buy time until you can pass higher prices on to your customers.
Don’t Let Customers Manage Their Cash Flow Challenges At Your Expense
Don’t let their lack of planning be your problem. There will be some acceptions, but overall stay disciplined in collecting the debt.
Debt Becomes A Bigger Risk
Variable rate loans are going to renew at much higher rates during times of inflation. Pay these down as soon as possible. Do you best to lock in rates if possible. The Federal Reserve will keep raising rates until they are satisfied they have inflation under control. It is not a fine science. They may adjust too much or too little. There are many uncontrollable factors you can’t control so it’s best to manage the ones you can.
Stock Up On Inventory If You Can
If you have the cash, now might be a good time to spend it. Purchasing goods before price increases could put you in a much better competitive position than your competitors.Just don’t forget rule number one – cash is king.Don’t risk cash reserves just to buy inventory.
Focus On Efficiency And Productivity
Wages and salaries are going up during inflationary times (this is a real nightmare for business). Spend time improving your processes. Look for areas of waste. Spend quality time thinking about and then implementing how work can be done more efficiently.
Become Aggressive With Frequent Small Price Increases
Your customers can deal with more modest price increases that become significant increases over time better than one big jump. It’s hard to believe inflation is going to keep increasing. However, for those who managed a business in the 80’s and experienced savings accounts paying 16% and mortgage interest rates at 18%, they know this can keep growing.
This is probably not going to be the most significant business challenge you will face in your career but it is a danger and if not properly managed could cost you your business. These steps help guide you through the turmoil, but depending on the severity you may need to take much bigger steps. Take time to develop your plan now, consistently review your plan, make changes when necessary, and keep moving the ball forward.
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