How Businesses Can Overcome Inflation
If recent economic conditions have you wondering how businesses like yours can overcome inflation, you're not alone. All but 15% of small business owners surveyed by MetLife and the US Chamber of Commerce in the first quarter of 2022 acknowledged concerns about the impact of rising prices. Plus, one third said inflation is the largest challenge for small businesses as a whole.
Reasons abound for higher prices—which have been consistently rising at rates not seen since the early 1980s—and include lingering supply chain challenges, persistently high demand from consumers and businesses, and soaring energy and commodity prices. Meanwhile, the amount of cash in the US system has remained near an all-time high, reflecting the combination of government relief, spending bills and near-zero interest rates from the Federal Reserve. All have combined to create the dynamic of too much cash chasing too few goods.
Regardless of the rationale, higher prices are today's reality—and your ongoing challenge. Here's how to rise to meet it.
5 ways businesses can combat inflation
To get a handle on inflation and offset its impacts—or at least soften the blow—take an objective look at how your company operates and question everything about business as usual.
More specifically, because inflation impacts businesses by sapping cash flows and squeezing profit margins, consider taking the following steps.
1 Review every expense
Rising costs tighten margins throughout your business, so heightened awareness over what the company is spending is a must to be able to counter inflation's impacts. Are there recurring costs that can be pared back to as-needed expenses or dropped entirely? How can you save on overhead through renegotiated contracts or new service providers?
2 Scrutinize supplier relationships
If the pandemic disrupted your supply chain, you have a head start on seeking out alternative suppliers. As materials, goods and labor continue to be in short supply worldwide, add supply chain reviews to your regular to-do list to ensure you're getting optimal prices on deliveries that meet your quality standards and arrive within an acceptable window of time.
And don't accept blanket inflation statements from suppliers for higher prices. Press them on how challenges are directly affecting their costs.
3 Emphasize efficiency
To get the most out of every dollar the business spends, find ways to improve processes and bolster worker productivity. The increased yield means more products to sell for the same investment.
Ask your front-line employees for suggestions and reiterate that the entire company will benefit from such efficiency as costs continue to climb. For example, vendor consolidation could streamline your back-office efforts.
4 Make smart financial moves
Build up your inventory and secure items today that you know you'll need in the future to buffer your business from higher prices down the road. Also take advantage of discounts on vendor invoices to help preserve cash. Borrowing funds at today's rates may not be as cheap as it was a year ago, but as inflation lingers the cost of loans will likely only climb higher.
5 Raise prices
Few times are better than during inflationary periods to ask your customers for more money for your goods and services. No one will question that your costs are surging, and the increased revenues will help offset these rising expenses.
Tread carefully, however. There's a fine line between an acceptable revised price and too much, so lean heavily on your knowledge of the marketplace and your top competitors.
Surfing the inflation wave
The combination of ways businesses can overcome inflation varies from organization to organization. But by keeping a sharp eye on your expenses and revenues, you'll increase your company's odds of riding out the current wave—and possibly thriving more than ever.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.
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