The financial response to economic pressures causes inflation. Inflation ripples its way through the economy hitting different businesses in different ways. COVID-19 greatly affected business, making situations more challenging for small business owners like you. It may impact your business negatively by lowering your profit margins and decreasing consumer demand. Inflation might not have affected your business, but you need to be ready to hit back in case of any pressures.
Producer Price Index
Statistical facts show that in G7 countries, the PPI (Producer Price Index) increased to 10% in the first half of 2021. What is PPI? For a challenge facing a company, the Producer Price Index is a crucial indicator for measuring the price of goods immediately after production.
Here are some strategies that may help you to mitigate your business in rising inflation.
Build Pricing Power for Your Business
As a business owner, you will have to pass on the increased prices to your customer if your business is affected by rising inflation. You need to strengthen your costing to fight any such risk and improve your competitive position in the market.
- Highlight your service/product strength and what makes it different from your competitors, and then lean into it.
- Use enhancement and branding to escalate and improve the uniqueness of your product/service.
- Use variable pricing strategies to target more customers.
- Use pricing mechanisms like commodity fees.
- Design short-length contracts with your customers.
- Introduce training and career development programs and enhance the customer experience.
- Offer other services free of cost (complimentary services) like subscriptions etc.
- Make your business one shop stop by offering other related services or products.
Make different “what if” scenarios using your financial forecast to mitigate risks during rising inflation. Listed below are various scenarios that you can consider to get ready for sudden inflation pressures.
- 25-50% increase is introduced in the wages.
- Increase in the prices of raw materials
- 25% or more significant revenue delays due to disruption in supply chains
You need to plan some “what-if questions” by using these scenarios. Examples of these questions are mentioned here:
- Does the business have enough cash in any case of any such condition?
- What avoiding actions can be taken during these conditions?
- How can risk management strategies be used to avoid such risks?
- What are the leading indicators that might lead the business to such situations?
Re-evaluate Labor Costs
Inflation has the most unpredictable impact on the labor market. In industries where skill trades are in demand and sectors that are knowledge-based, it is observed that demand for wages has increased due to inflation. It is hard to predict which businesses/markets get affected the most. However, statistical analysis has shown that the following markets have been impacted the most by rising inflation.
- Professions that are high in demand and are knowledge-based like software engineering and software development etc.
- Jobs that are minimum or low wages.
- Contract laborers or laborers who can reprice their service/work costs faster than W2 laborers or workers.
If you have a company or a business with no such workers or laborers, you need to strategize methods to retain your employees or look for new talent in the market. You can use non-financial compensations like employee benefits to keep your employees and hire new people. Also, you can offer pay raise according to the market prices of the work.
Employee satisfaction is a big plus point that will make your business less vulnerable to inflationary pressures in the market. You should keep this factor in mind and review it in the new business forecast for your company.
Apply for a Loan
With a rise in inflation, the interest rate gets low. Considering that you have to pay a lesser interest amount than what you will borrow, now is a great time to apply for a loan. Use this loan amount as an investment in your business. You can use the following opportunities to invest the loan money:
- Improve marketing and branding strategies for your product/ services
- Buy assets like machinery or real estate
A rise in inflation can affect your business and its financial conditions. Meet your finance team regularly and regularly evaluate your business and its monetary needs. Further, plan effective inflationary risk management strategies for the future.