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.
How to win the battle against inflation
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.
To raise prices without angering customers, implement higher pricing in stages, communicate what’s happening with transparency, and create additional value where possible.
1. Cut the fat to combat inflation.
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:
- Eliminate excess staff. If you have a seasonal business and your employees are all full-time, consider letting the least effective ones go and hiring part-time staff as needed. If you have hourly employees, consider cutting hours.
- Harness technology. Tech tools can streamline operations and save you money. For example, create and schedule social media content in-house via social media marketing tools like Sprout Social, Hootsuite or SocialPilot instead of hiring a social media manager. If your finances are straightforward, consider using one of the best accounting software tools like QuickBooks (read our QuickBooks review to learn more). With periodic oversight from an accountant, accounting tools can handle most tasks and eliminate the need for an on-staff bookkeeper.
- Sell off extra inventory. Inventory creates storage costs. If you have excess inventory taking up space, run a promotion and get rid of it to save and generate money simultaneously.
- Reduce your product breadth. Stop selling items with lower sales volume and concentrate on your bestsellers. You may be able to negotiate a lower per-unit cost if you buy more of specific products.
In a recent Goldman Sachs study, 76 percent of business owners said their company’s financial health has been hurt by inflation, and 97 percent had hiring challenges.
2. Collect outstanding invoices to combat inflation.
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:
- Offer a discount for early or on-time payment. This is a win-win since it benefits the customer and gets the cash flowing in.
- Require upfront payment. Insist on upfront payment or a deposit payment before you start work. This gives you a cushion and protects your company from nonpayment.
- Charge interest and late fees. Institute a policy where you charge interest or late fees on unpaid invoices. These fees accumulate and can help ease immediate cash needs as well as pay for the extra costs involved in chasing customers for money.
3. Reduce your supply chain risk to combat inflation.
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.
4. Negotiate better deals to combat inflation.
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.
5. Retain your employees to combat inflation.
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:
- Lost productivity as a new employee learns the ropes
- Lower companywide morale
- Disrupted customer relationships
- Cost of new employee training
If you can’t give raises, offer employees creative perks:
- Allow flexible schedules. Create a flextime policy that allows employees to work from home part of the time, or come in earlier and leave earlier.
- Empower employees to make decisions. Another smart strategy is giving employees more power to make decisions and contribute to the company. This demonstrated trust can have big morale payoffs.
- Recognize employee efforts and accomplishments. Acknowledging employee efforts and accomplishments is another way to boost employee engagement and morale.
In addition to improving employee retention and morale, employee engagement strategies help prevent employee burnout, which is damaging for employees and business operations.
The risks of not planning for the effects of inflation
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:
- Falling profit margins. Since costs are higher, you’ll make less profit — unless you decide to raise prices, which also carries risks. You’ll do the same amount of work for less money, and depending on your current profit margins, this may eliminate your profitability altogether, putting you in jeopardy of going out of business.
- Shrinking customer base. If you decide to raise your prices to maintain your profit margin, you will likely lose customers and lower your overall sales revenue. In an inflationary economy, customers feel the pinch just as much as businesses. If you raise your prices, some of your existing customers may be unable to afford to do business with you.
- Lost market share. Just because you failed to plan doesn’t mean your competitors didn’t prepare. Maybe some of your competitors were more forward-thinking and adjusted their business models for current conditions. As customers leave your business, they’ll head to your competitors. Your company reputation is sure to take a hit as fleeing customers warn others of your high prices or inability to provide a great customer experience. Once lost, your market share will take time, effort and a significant investment to rebuild.
- Stress. Without a plan, you’ll be at the whim of the market and must deal with multiple crises. For example, if you rely on only one supplier and there’s a supply chain problem, you’ll need to find a replacement quickly to fulfill customer orders. Vetting new vendors takes time, and you’re unlikely to get the same favorable terms your previous go-to supplier provided. This urgent problem-solving is stressful and expensive.
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.
Survive and thrive during inflation
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.