A perfect storm of lingering effects from the pandemic, persistent supply chain issues, war overseas and labor shortages have created high inflation in the U.S. economy.
Inflation squeezes your business in two ways: It increases costs for products, raw materials and labor, and it depresses demand because customers have less money to spend and are more careful about how they spend it.
We’ll explore strategies businesses can employ to battle inflation and share the risks of failing to plan for inflation’s effects adequately.
According to the Bureau of Labor Statistics, the consumer price index has risen by 8.2 percent over the past year, as of September 2022. The United States hasn’t experienced inflation numbers that high since the 1970s. Although the Federal Reserve has raised interest rates to curb inflation, this action takes time; the Fed doesn’t expect inflation to come down to its target of 2 percent until 2025.
Even if you conduct business internationally, you’re not protected. Sixty percent of advanced economies are experiencing inflation, and some nations, like the U.K., have an even worse problem with inflation, according to the Bank of International Settlements.
Raising prices may seem the most immediate solution. While this is a valid strategy, it should only be used as a last resort and in moderation since it tends to alienate customers. Here are some other strategies to try first.
The first step of fighting inflation is to examine your expenses and find inefficient, unused, unnecessary or obsolete aspects of your organization. For example, optimize your warehouse operations. Are you using all your warehouse space? You may be able to ditch your current facility and rent a smaller warehouse. If you have unused or underused assets, sell or lease them to others to increase cash flow.
Here are some additional ways to make your organization leaner and more cost-effective:
If your business has customers who aren’t paying their bills, pay attention to your accounts receivable process to improve your cash flow. Remind customers that their invoice is due or past due. If that doesn’t prompt them to pay, try these tactics:
Supply chain disruptions contribute to inflation, reducing the supply of goods while demand stays the same or increases. If you buy wholesale or rely on raw materials or component parts, especially from overseas, you may find yourself having trouble getting them promptly. Factories in Asia may be shut down temporarily or have labor shortages, while shipping, trucking or logistics companies might be short-staffed.
Supply chain disruptions cause businesses to scramble to source necessary items somewhere else. Mitigate your risk by having multiple suppliers and shippers you can pivot to if necessary. Establish ongoing relationships with them so they don’t charge you emergency pricing if and when there’s a problem.
Inflation affects your suppliers as well as your business and customers. If a supplier contract is up for renewal, you have some leverage. Try to negotiate a win-win deal that brings you better prices or terms. Offer to order more regularly or place larger orders in return for a discount. When a supplier knows it can count on your business, it may be willing to offer concessions.
Inflationary pressures affect employment. In the current labor market, many employees leave their jobs and pursue new positions with higher pay and more employee benefits.
Talent is in short supply, so if an employee quits, it will cost you more to replace them than you’re already paying. According to a Glassdoor study, hiring a new employee incurs an average of $4,000 in costs. If an employee who quits is an IT professional or C-suite executive, replacement costs can rise much higher.
Employee turnover has additional disadvantages, including the following:
If you can’t give raises, offer employees creative perks:
Successful businesses know how to adapt to changing circumstances like economic upheaval. If you don’t plan for inflation — which is already a reality — you’ll be caught flat-footed and forced to make quick decisions that could be costly.
Risks of not preparing for inflation include the following:
Faced with untenable circumstances, some businesses lay off employees. However, voluntary severance is another option to effectively downsize and cut costs while giving workers financial assistance during the transition.
Inflation is here for now, and probably for the next several years. Put strategies in place to adapt so your business can survive and thrive during this period. If you’re agile and resilient, your business will be even stronger once the inflation rate drops to normal levels.