By: Chuck Mullen, CPA, CMA, M. Tax
Inflation, ahem, higher than ideal inflation, is here and it’s impossible to predict how long it will last, because this new variable, global supply chain interruptions, has been thrown into the equation for which our Federal Reserve has no known tool. It certainly seems the pandemic monetary policies contributed to the current state of affairs (keeping interest rates low while injecting capital into the economy). But the kinks in the global supply chain hose, caused by countless chain reactions to pandemic-caused global production and distribution interruptions, will simply need to be resolved before any state of normal inflation can be attained.
Unique to this era’s inflation is the elephant in the room, the national (and worldwide) labor shortage. Millions of workers have left the workforce, which is driving up a cost that typically only goes up and never comes down, wages. Rising home values, stock values and government transfer payment programs have afforded many workers the capacity to take a breather and calculate their next moves. Companies will need to enhance wage and benefit programs for their entire workforces to woo these workers back (assuming demand holds up at all).
We have surpassed yesterday’s healthy tension level of 2% inflation and have entered the awkward but corrosive second stage of inflation, known as “Walking Inflation,” whereby prices are increasing just enough to cause consumers to hoard or buy products in advance. It’s a phase where inflation can impact buyer behavior, which can further cause a “spiraling effect” of increasing prices, causing increasing wages, causing increasing prices, and so on. We are quite a distance away from the third stage of inflation, that 70s-era Galloping Inflation, and we are light years away from the fourth stage known as Hyperinflation (so, let’s just not ever use that term, ok? 😊).
With inflation, it’s important with our businesses that we stay rational but informed (and hyper attentive). To put it mildly, inflation is “one more damn thing” to keep track of. But do know it has a trajectory which eventually plateaus, and our goal is to arrive at that plateau with our businesses intact. In many companies, inflation will be more difficult to track than in other businesses based on a multitude of reasons such as volume of products, services, and many more attributes.
Here are ways business leaders can manage inflation. These tips can propel an organization from losing, to surviving, to winning against inflation:
- Cash becomes a hot potato with inflation. It erodes in value. Get that cash invested in something…but what? Read on…
- Consider converting that cash into prepaid inventory at today’s prices (caveat: make sure all divisions in the company are communicating about inflation-hedging moves…do you have room to store that excess inventory? Could it quickly become obsolete?)
- Determine how your inventory policies make you vulnerable to inflation and stock-outs (e.g., JIT).
- Consider futures contracts and forward pricing to lock in costs of inventory.
- Supplier relationships have never been more important, keep an open line of communication with your suppliers and engage in give-and-take arrangements for a win-win with suppliers.
- Consider buying real estate (if appropriate) with a loan today. Tomorrow’s loan will likely be at a higher interest rate, and tomorrow’s rent renewal will likely be higher, both as predictable results of inflation.
- Consider giving your landlord the gift of certainty with a lease extension today at a locked in rate tomorrow.
- What’s worse than cash during a recession? Accounts receivable. Slow payers need to get right-sized now. That slow cashflow just exacerbates the problem of cash value erosion.
- Hyper focus on your processes more than ever. Inflation erodes margin, so we must squeeze the offset from efficiencies through step reduction and automation.
- Wages will likely escalate, and price increases will have to follow. Scrutinize closely what others in the market are doing with pricing. You’re likely going to need to raise prices, but you need do so with caution and market awareness. Know how elastic your products and services are to price increases.
- Communicate ahead of potential price increases. Do not catch your customers off-guard.
- Prepare hypothetical forecasts and update them frequently for worst case scenarios while constantly revising inputs to determine potential outcomes.
- Consider shifting focus and resources toward the most valuable and price elastic products and services, and eliminate low ROI products and services (heck, we should be doing that anyways).
- Consider focusing on your current customer base for both cross-selling and retention. This is an efficient action since it is much more expensive to obtain a new client than it is to retain a current one.
- Make sure to not sacrifice long term strategy with expense reductions. Easier said than done but remember, there is life after inflation to be planned for.
Inflation hedging requires counterintuitive thinking but with persistence and vigilance, we will all arrive at the new normal unscathed. Historically, inflation raises prices, wages and input costs to a new level and then flattens out (relatively speaking). Deflation typically does not occur, and so, the exercise of adjusting has an end to it, thankfully. Please contact me directly at cmullen@applegrowth.com and I will be thrilled to strategize with you to make inflation work for, and not against, your business.