Inflation recently hit a 13-year high in the United States, reflecting a broad increase in prices as businesses reopen and Americans spend their stimulus checks. While some inflation can signal a healthy economy, it can have far reaching implications over an extended period. The good news is a little foresight can go a long way when it comes to preparing your business for rising inflation. Simply being aware of the potential risks and planning accordingly can help you avoid a major hit to your bottom line.
When it comes to preparing your business for rising inflation, consider these 7 strategies:
Inflation Strategy #1: Build Your Cash Reserves
Not all businesses experience inflation the same way. In some cases, inflation can provide a boost (for example, if home prices are rising and you’re a real estate agent). Alternatively, it may compress your profit margins if your costs increase, and you can’t raise prices.
As with any financial setback, it helps to have extra cash on hand to compensate for leaner times. Therefore, cash flow planning is essential when it comes to preparing your business for rising inflation. By building your reserves when cash flow is strong, you’ll have a cushion to help weather the storm if inflation takes its toll. It can also help you avoid taking on debt at inopportune times.
Inflation Strategy #2: Know Your Profit Margins
Raising your prices may not be your first choice to combat inflation. Unfortunately, in some cases it’s necessary to stay profitable. To do so successfully, you need to understand your current profit margins.
You’re likely familiar with your margins if you keep good accounting records. Otherwise, create a list of your prices relative to current business expenses. If inflation causes your underlying costs to rise, you can raise prices accordingly—and only when necessary.
Inflation Strategy #3: Reduce Inefficiencies and Lower Costs
The other way to maintain profitability when your margins tighten is to lower your costs. Of course, doing so when prices are already on the rise may not be easy. Nevertheless, you can prepare your business for rising inflation by reducing inefficiencies where possible.
First, review your current expenses and see if anything can be cut or minimized. Then look for opportunities to decrease costs by eliminating redundancies. This may require you to run a leaner ship than normal. However, it also means you may be able to avoid future cuts when you’re already strapped.
If inflation impacts your costs, you may be able to negotiate better deals with suppliers as prices rise. For example, you can ask for a better price if you purchase in volume. The supplier gets more of their revenue up front, and you can pass any potential savings on to your customers, keeping both sides happy.
Inflation Strategy #4: Develop Contingency Plans
As you’re preparing your business for rising inflation, you can also look for opportunities to build contingency plans into your business model. For example, you may be able to negotiate long-term contracts to lock in prices. Or you might be able to expand your business into areas that are less price sensitive. If you anticipate needing future financing, you may want to consider taking out a loan when rates are more favorable.
Planning ahead can be challenging, especially when you’re heavily involved in the day-to-day operations of your business. However, taking some time to put contingency plans in place now can help you avoid headaches in the future.
Inflation Strategy #5: Time Your Capital Investments, If Possible
As your business grows, you may need to invest in new equipment or technology to continue operations. You may also be able to increase productivity by upgrading or cut labor through automation. In any event, you’ll want to make these investments when prices are favorable.
If you anticipate future capital investments and can negotiate a better price now, it may make sense to adjust your timeline. And if you don’t have excess cash on hand, you may be able to lock in a better financing rate when inflation is low.
Inflation Strategy #6: Manage Your Personal Investments
Though your main focus may be preparing your business for rising inflation, don’t forget to prepare your personal investments as well. Your retirement savings should be invested in asset classes that outpace inflation over time, so you don’t lose purchasing power when you need it.
Certain investments are better hedges against inflation than others. Equities are the best example, as they tend to generate a higher return than other asset classes over time. However, gold, commodities, and real estate also tend to offer protection against inflation in a diversified portfolio. The important thing is not to keep your retirement savings in cash, as inflation can erode its value over time.
Inflation Strategy #7: Work with a Financial Advisor
Finally, if you need help preparing your business for rising inflation, consider working with a financial advisor. An experienced advisor can help you develop and implement strategies in your business and personal finances to offset inflation risk. In addition, he or she can help you anticipate shifts in the market that may have an impact on your bottom line.
Oak Capital Advisors works exclusively with business owners who want to successfully exit their business and retire on their terms. If you’d like to discuss your financial needs with a CFP® Professional and Certified Exit Planner®™, get started by requesting a free retirement assessment.