The dollar had an average inflation rate of nearly 9 percent in the last year. As a result, the real value of a dollar has been decreasing recently. The increasing inflation rate has dramatically impacted business and the economy. Many business executives seek practical strategies to fight inflation.
3 most important inflation impacts on businesses
#1 Cash loses value
Holding much cash in an inflationary environment can be a disadvantage. So it is better to deploy cash before inflation rates go higher and the value of the money goes down.
#2 Increasing cost of goods sold
Example: Assume a construction company contracts to build a $1 million building with an initial cost of materials of $350,000. When the company purchases those materials, the price of two-by-fours may have doubled, driving the cost of goods up and margins down.
Business executives find it challenging to pass those increased costs onto the consumer. In addition, they will likely also spend more money acquiring and retaining sub-contractors and employees, further negatively impacting the bottom line.
#3 Overall profits squeezed
Access to capital becomes limited as profits diminish for some because their credit facilities’ covenants require certain levels of profitability. In the construction company example above, an anticipated $250,000 profit may fall to $200,000 because the cost of goods increased, requiring more investment for the same materials. So, what can businesses do now?
3 strategies to fight inflation
#1 Carefully raise prices
Business leaders must evaluate their current pricing structure and look to incorporate price adjustments into contracts. Logistics and trucking firms, for example, institute a fuel surcharge when diesel fuel rises above a certain amount.
With the current situation, most businesses expect price increases. So, moving swiftly to adjust pricing and hedge for the future makes the difference in a successful pricing strategy. Consider adding value to support price increases. For example, a software business could bundle additional services at low prices.
#2 Stock up on supplies and raw materials
With high cash levels, consider front-loading or buying raw materials in bulk (instead of buying six months from now) to save money and obtain a bulk discount. If strapped for cash, consider borrowing to stock up.
#3 Reevaluate cash and credit facilities
If doing well, consider going to the company’s credit facilities to secure a loan because the business will pay the loan back with less valuable dollars. For example, what $100 will purchase today differs from six months ago.
Also, consider making those technology, personnel, and other investment moves essential to driving growth and efficiencies, providing long-term benefits. For example, investments in buildings, machinery, and even an acquisition are viable options.
Regardless of the chosen strategy, evaluate how competitors react to the situation. Furthermore, monitor the health and performance quality of suppliers.
There is an opportunity to win
All business cycles produce winners and losers. However, opportunities abound depending on the current state of the business and the speed of decision-making.
Deborah Fell is a partner and chief marketing officer (CMO) with Chief Outsiders, a company offering fractional CMO services with Fortune 500 experience. Kevin Scott is a partner & certified business transition expert with B2B CFO, providing management advisory services to privately held companies, with a focus on increasing cash and company value.