Inflation refers to the general increase in prices and the relative decline in a consumer’s purchasing power. Although some degree of inflation is considered desirable by monetary policymakers — in fact, the Federal Reserve aims for an annual 2% target inflation rate — but, when overshot, it can wreak havoc on the American consumer.
This is as true for consumers as it is for entrepreneurs. Take it from me, a serial entrepreneur over multiple decades, whose companies weathered years of relatively high inflation, such as in 2005 (3.39%), 2008 (3.84%) and 2022 (8.38%).
As I’m typing this article, the U.S. consumer price index (CPI) is at 4.9%. By the time you read it, it may be higher or lower; yet, in any case, it’s key that, if you’re a business owner, you need to prepare yourself for the next major period of inflation if you want your business to survive. In this article, I’ll detail how I managed to do this with my own companies.
Here is my inflation protection strategy for entrepreneurs:
Related: 4 Ways to Protect Your Business From Inflation
1. Monitor and adjust pricing
During periods of high inflation, your cost inputs are likely going to rise across the board. A weekly delivery that once cost you $1,000 might now cost you $1,200, and shipping and handling costs on your international freight now cost 15% more overnight.
As an entrepreneur, you have to be prepared for these potentialities by responding in step with your own pricing.
For service entrepreneurs, you have to walk a fine line when raising prices in order to not damage your customer relationships. Therefore, I recommend doing what McKinsey describes as “maximizing non-price levers” to adapt to an inflationary environment (i.e., rolling back discounts and packages and avoiding raising prices wholesale).
2. Review and diversify suppliers
Don’t count on a single supplier to keep your business afloat during high inflation periods. If prices increase, you’re completely beholden to their price adjustments. Instead, keep a varied, multi-channel supply chain with several options available in order to seek out new inventory or materials in case one supplier decides to raise their prices to unsustainable levels.
3. Efficient inventory management
Reviewing your inventory levels is also a must during high inflation. It’s critical that you don’t overspend on raw materials, storage or transportation when prices are soaring. Be sure not to overstock items and keep an optimal inventory level that meets consumer demand without adding on the costs of oversupply if it can be prevented.
Keeping equilibrium-level inventory helps reduce the cost of goods sold (COGS) which, in turn, allows you to charge lower prices to your customers. When the average American consumer is having their purchasing power eroded by inflation, keeping your prices low can help ease their financial burden and can win you a lot of long-term goodwill.
4. Streamline operational efficiency
Unfortunately, high inflation periods call for some tough decisions to meet your bottom line above water. I’ve often had to lean out my businesses during inflationary years, including laying off excess talent and reducing or eliminating wasteful processes or workflows.
Improving company-wide efficiency in this way can help you lower expenses and keep your business cash flow positive when consumer demand decreases due to inflation.
Related: 3 Strategies for an Inflation-Proof Business
5. Diversify your financial reserves
Savvy entrepreneurs should keep cash and non-cash financial reserves to lean on during times of economic distress. Personally, I recommend diversifying your rainy day fund with a variety of assets that have historically performed well during inflationary periods, such as gold and other precious metals, as well as Treasury bonds and cash-like equivalents.
During high inflation, you need to make sure you have reliable stores of wealth even when the U.S. dollar is in sharp decline. In my experience, precious metals and other assets seen as inflation safe havens have been effective in storing my company’s reserve wealth.
6. Consider alternative financing options
When inflation peaks, interest rates flare up in order to encourage consumers to spend less and save more. This, of course, is bad news for business owners as it reduces the number of customers who walk through your doors while also increasing your borrowing costs.
If inflation impacts the interest rates on your financing, consider any alternative options available in order to keep your access to capital costs lower, including:
Related: Inflation Is a Risk for Your Business, But Doesn’t Have to Spell Doom
7. Stay tuned in
My best advice is to not let inflation take you by surprise. Instead, be proactive by keeping an eye on market cycles and keeping tabs on financial news — especially when monthly inflation reports are released by the U.S. Bureau of Labor Statistics.
Keeping abreast of economic and industry trends can give you time to plan ahead of inflation, buying you precious time to contact your suppliers, creditors and even customers if necessary.
Being an economically aware business owner also means joining trade associations, local business associations and networking events. Joining a community of industry professionals or local entrepreneurs gives you a network of peers who can inform you of market trends and offer advice on how to navigate a quickly changing economic environment.
Efficient inventory management, proactive leadership, responsible preparation and nimble pricing strategies are all parts of an effective inflation strategy for entrepreneurs. For over 20 years, I’ve employed these strategies to keep my businesses not only afloat, but thriving, during periods of high inflation — I’m hoping you can do the same in the months and years ahead.
Read the full article here
