Getting up in the morning to seize the day is growing increasingly difficult for many business owners. Rising inflation has made it harder for entrepreneurs to maintain business much less remain profitable.
But controlling the rise of inflation is the job of the Central Bank. It’s a situation that you have no control over. For entrepreneurs, business must go on. The question is “For how long?”
In order to get out of bed every morning with a sense of purpose, you have to smell the coffee. You’ll have to make changes in your business strategy to cope with rising inflation.
With proper planning and adopting a flexible mindset, not only will your business survive rising inflation, it might also thrive.
How Rising Inflation Rates Affect Businesses
The simplest definition of inflation is that it is the measurement of the rise in prices of goods and services in an economy over a period of time.
In a market economy, you have buyers and sellers. The prices of goods and services can rise from both the demand side (the buyers) and the supply side (the sellers).
From the demand side, if demand for a product is high, sellers would increase their prices for the product and push inflation rates up.
From the supply side, if the cost of raw materials increases, the cost of production would be higher. Sellers would then pass on the increased cost of production to buyers in the form of higher prices.
What factors affect supply and demand?
- The economy is growing;
- The Central Bank prints more money for circulation;
- The government passes laws to protect local producers by making it more expensive for businesses to import raw materials;
- Growing national debt;
- Currency depreciation;
- Rising unemployment rate.
The current rise in the inflation rate is fueled by increased unemployment and the rising cost of the primary factors in production. These factors were triggered by the COVID-19 pandemic and Russia’s invasion of Ukraine.
The pandemic forced many businesses to close down which led to high unemployment levels. However, the lockdowns gave employees the time to reassess their careers.
They realized working the 9-to-5 shift didn’t assure job security. The lockdown created an opportunity for people to study the viability of working from home either as freelancers, virtual assistants, telecommuters, or e-commerce entrepreneurs.
Remote work made it possible for people to earn good money, spend more time with their family, have better job security, and lower the risk of getting infected by COVID-19.
By the time the economy reopened, many employees didn’t want to report for work. This event labeled “The Great Resignation” created a situation where there were plenty of jobs available but no takers.
Companies were forced to try and entice workers to sign up by offering higher salaries and better compensation. Higher salaries meant higher prices of good services and helped push inflation rates up.
Then, came Russia’s invasion of oil-rich Ukraine. The invasion cut oil supply and drove up the cost of petroleum products such as gasoline and diesel which are primary factors of production.
The residual effect also led to a shortage in fertilizer that reduced the yield in agricultural products and drove up the cost of food. Worse, many countries, particularly Sri Lanka, experienced hunger on a massive scale.
How Increases In Inflation Are Managed
As mentioned above, the Central Bank is the key institution tasked to control rising inflation. The CB’s primary weapon is the interest rate. Specifically, increasing the interest rate.
Theoretically, how does an increase in interest rate control the rise of inflation?
- Higher interest rates mean more attractive rates in financial placements. Consumers are encouraged to take advantage of the higher yields by parking their money in select financial placements than spending them;
- Higher interest rates will discourage businesses from borrowing to expand their operations;
- Higher interest rates will discourage consumers from applying for business loans and home loans.
Thus, there’s a trade-off when the CB tries to manage rising inflation rates by increasing interest rates – the growth of the economy slows down.
11 Tips To Help Your Business Cope With Rising Inflation
In the current situation, business owners are operating in an economy whereby consumer demand is sluggish and the costs of producing goods and services are rising.
And with interest rates climbing, businesses and consumers that have existing loans with variable interest rate arrangements have to deal with financing increasing monthly payments.
With these economic conditions in mind, what can you do to help your business cope with the effects of rising inflation?
1. Increase Prices
As the saying goes, let’s talk about the elephant in the room.
Raising prices isn’t a necessary evil. You’re not being indifferent to the plight of your customers. It’s just how business works. If the cost of production increases, consumers expect businesses to pass the increased cost to them.
But if there’s a silver lining to increasing prices – it will determine how your products are valued in the market. Likewise, raising prices will identify who your loyal customers are.
Don’t get pulled into a price war with competitors who are dropping prices across the board.
Perhaps, you can lower the prices of slow-moving products but not your signature items. Otherwise, you’ll end up commoditizing them and reducing their value in the market.
2. Maintain Prices But Reduce Quantity/Volume
You might be happy that your favorite cereal maker maintained the prices of their products. What you might not be aware of is that the cereal maker skimmed off the quantity of cereal in the box.
This is an old-school business strategy called “Shrinkflation”.
A good example of a company that applied shrinkflation to their business is Wheat Thins which maintained its price but reduced the net weight of crackers per box from 18 ounces to 14 ounces.
Customers will be happy just getting their daily fix of your products as long as they don’t spend more on it. Of course, you can’t please everybody. But just like raising prices, this inflation-busting strategy will help separate wheat from the chaff.
Our tip to mollify your customers: Be transparent about your move to reduce the quantity. Make sure the adjustment in net weight appears on the label.
3. Focus on Improving Efficiency
To improve business efficiency, you have to increase productive hours while maintaining or increasing output.
Is this possible? Yes!
- Measure the ROI of your employees. How much does each employee contribute to the growth of your business? Who among your employees can multi-task or is ready to take on higher responsibilities?
It might be painful to let go of employees but during a time of economic uncertainty, you have to become more efficient in the utilization of your assets. Unfortunately, in every business, there are leaders and laggards.
It doesn’t make sense to pay them the same amount of money when the other person consistently underperforms. It’s time to trim the fat and retain only the productive employees.
- Outsource Work. Focus on the core functions of your business – the tasks that are directly related to your enterprise and generate income. The rest of the non-core functions can be outsourced to qualified third parties.
For example, accounting is an important function of every business but it doesn’t improve your bottom line. The same goes for functions such as Human Resources, Marketing, I.T, and Customer Service.
You can outsource these functions to third parties that have the expertise, experience, and talent to manage the related scope of work better than you.
You’ll save money because the payment arrangements are flexible and the contracts can be terminated at any time.
- Create Distribution Networks – This strategy is similar to outsourcing work because you’ll be delegating sales to a third party. Instead of hiring salespeople to handle your sales, create a network of distributors and resellers.
Distributors will pay to sell your products in their designated areas and will be accountable for the payment due to their resellers.
4. Automate or Digitize Processes
The results of a survey conducted on 4,000 companies by Cognizant and published by the Harvard Business Review revealed that more than 50% of respondents planned to increase their investments in programs that improved process efficiency.
Having Artificial Intelligence (AI) and Machine Learning (ML) technologies in place are great but could be expensive.
Small businesses with tight budgets can automate or digitize processes by integrating software applications and programs that were designed to manage a specific area of responsibility.
For example, by integrating productivity apps such as Asana, Trello, or Basecamp into your process flows, you’ll be able to organize tasks, monitor project timelines, manage productive time, track expenses, and enhance collaboration among your team members without spending much money.
By simply installing chatbots in your website and social media platforms, you can have 24/7 customer support available for your end users and potential clients.
5. Streamline Expenses
If generating income is difficult, look toward the other variable in the profit equation – expenses. You can slow down your financial bleeding by finding ways to streamline costs.
In addition to outsourcing work, review your current business model and see if a remote business model is doable.
A remote business model incorporates processes that can be done outside the confines of a physical office. For example, have a percentage of your employees work from home as telecommuters.
Let’s assume that your office layout allocates 1.6 square meters per employee. If you currently employ 10 people and designate 50% as telecommuters, you can potentially reduce the size of your office by 8 square meters or more and save up on rent.
If you’re running a restaurant business, you can consider focusing more on delivery services. Move to a smaller location and allocate more space to revenue-generating activities – cooking, food preparation, and packaging – and lower your monthly operating expenses.
Or if zoning regulations in your area permit it, why not just convert a part of your home into a commissary and run your food business from there?
6. Assess Your Current Supply Chain
Of course, you never want to compromise quality. When business is bad, one of the first steps you can take is to renegotiate your arrangement with your suppliers.
Meet with your primary suppliers and try to work out arrangements that lower costs or improve cash flows. You might be surprised that many of your suppliers – especially those who have been with you for years – are more than willing to accommodate your requests.
Now, if negotiations don’t go your way, then be prepared to revamp your supply chain and look for vendors who can meet your needs.
Of course, you get what you pay for and there’s a risk of compromising product or service quality. Thus, replacing suppliers can be a slippery slope that you must navigate carefully.
Going back to our example of running a restaurant business, you should request product samples from prospective new suppliers. The samples will be used for kitchen and market testing.
7. Assess Your Product Mix
If you don’t want to touch your supply chain, you can also review your current product mix. Identify the products and services that offer you the highest profit margins and promote these more actively to your customers.
Conversely, you might want to consider removing products and services that haven’t been performing well and are expensive to maintain.
Another strategy is to review your prices and see which products and services can be packaged together and priced higher while successfully creating a perception of better value.
8. Capitalize On Your Current/Existing Customers
Creating new markets and finding new end users of your products or services is a smart business strategy.
But here’s a good reason why you should always, ALWAYS, take care of your current customers.
According to HubSpot, just by retaining 5% of your current customer base, you can improve revenue generation by as high as 95%!
There are 2 good reasons for this:
- As current end users of your products and services, these customers are already familiar with your company. They don’t have to second guess their decision to patronize your business. Your existing customers will continue to shop at your store or hire your services.
- Your current customers will gladly recommend your business to their friends and family.
The key to maintaining your customers is to keep them happy. Make sure your products and services are always of high quality. If they have inquiries or questions, respond within 24 hours if possible.
Maintain a high-touch approach and reach out to them periodically. Ask them how they’re doing and if you can help them out with any concerns they may have.
9. Stock Up on Inventory
Usually, you wouldn’t want to stock up on inventory because it might affect your cash flow and bottom line.
But these aren’t normal times. The main priority is to cope with the rising inflation by managing the increasing cost of production. If you have an opportunity to get discounts on the cost of raw materials by buying in volume, go for it.
Suppliers and wholesalers will often offload excess inventory by offering attractive discounts for volume purchases. Before availing of these discounting arrangements, check the quality and verify the expiration dates of the products being sold.
Sure your cash flow might be affected by the slowdown in sales but you can improve your chances of staying profitable by keeping your costs low.
10. Renegotiate Your Loans
Once the Central Bank increases its cash rate or lending rate, existing loans that have variable loan rates will be affected.
If you’re one of those affected, initiate a meeting with your bank and renegotiate the terms of your loan. You won’t be the only one. And banks are aware that when interest rates are adjusted upward, they will be besieged by borrowers who want their loan arrangements renegotiated.
The chances of having your loan renegotiated successfully depends on your credit and business history. If you’re only a few months behind in payments, the bank will understand that recent events affected your ability to stay current.
11. Take Care of Your Employees
It’s not just your customers that you have to keep happy. You must also keep your employees happy in order to retain them.
If employee turnover in your company is high, you’ll be spending a lot of money recruiting, selecting, hiring, and training new ones. The cost of advertising job openings can be quite expensive and the time spent qualifying them will keep you away from handling functions that generate revenue for your business.
Likewise, you can generate revenue from new employees right away. There’s a learning curve to respect and it will take some time for your new hires to get up to speed.
You can’t put them on the floor or let them go live until they’re absolutely ready to represent your company.
So how do you keep your employees happy? It’s not just about giving them higher pay. For sure, a better salary and compensation will help.
But employees value being valued.
Include them in the decision-making process by encouraging them to provide their input. Make sure you have career pathing and succession planning programs in place and discuss these with your employees.
Entrepreneurs are a different breed because they can recognize opportunities that others can’t. Rising inflation makes it more challenging to run a business but challenges are there to overcome.
Reviewing your current business model with a flexible mindset can help you find ways to cope with rising inflation by addressing the supply and demand sides of your enterprise.
Inflation isn’t the end of the world. In fact, following our tips in this article, may give you the opportunity to improve efficiency and become more profitable when the economic situation gets better.
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