By Andrew Herrig. Originally published at ValueWalk.
A few months ago, what seemed to be transitory inflation appears here to stay, at least for the medium term. According to a National Federation of Independent Businesses survey, 22% of small business owners cite inflation as their most important concern, a 20-point increase from 2021. “Inflation is at the highest level since the 1980s and is having an overwhelming impact on owners’ ability to manage their businesses,” said NFIB Chief Economist Bill Dunkelberg.
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While no one can definitively say how high inflation will rise in 2022, the Federal Reserve appears to be gearing up for a significant battle. Goldman Sachs is forecasting five interest rate hikes this year, a sign that there are serious worries about inflation’s impact on the economy. Fortunately, entrepreneurs have strategies to defend their businesses against the most inflationary environment seen in three decades. By implementing these seven steps now, business owners can set themselves up to navigate rising inflation successfully.
Refinance Debt Now
The 10-year treasury rate bottomed around half a percent in 2020 and has been steadily on the rise since. With most economists forecasting continued inflation in 2022 and the Fed signaling multiple interest rate hikes in the coming months, now is an excellent time to lock in low rates.
If you have short-term business debt, it may be a good idea to convert it to a longer-term note. For variable-rate lines of credit or high-interest credit card debt, look into debt consolidation and ways to get a fixed interest rate. For example, can you take out a long-term loan secured by your business assets or real estate?
By converting to long-term debt with a fixed interest rate, you can better predict your future debt obligations and have the peace of mind that you are avoiding increased interest payments as rates rise due to inflation.
Get Serious About Cash Management
In an inflationary environment, the value of the money your business holds in cash and cash equivalents declines precipitously over time. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index rose seven percent from December 2020 to December 2021. That means that every dollar you held in 2020 was worth only 93 cents a year later.
Most businesses need some cash available to pay near-term costs or keep operations running while waiting on payments from customers. Even sweeping unneeded cash into interest-bearing savings accounts, money market funds, or short-term bonds can help offset the decline in the value of your money, especially as interest on deposits begins to rise along with the Fed rates.
However, now is an excellent time to evaluate how much cash you genuinely need to hold and how much can be invested into longer-term income-producing (and inflation-hedging) tangible assets.
Invest in Business Growth
It may sound counter-intuitive, but investing in productive assets at the beginning of an inflationary period can be a winning business move. By taking on additional debt now to finance the purchase of property, equipment, or inventory, you can pay off the debt with cheaper dollars in the future.
In addition, tangible assets such as buildings or production equipment often hedge against inflation and hold their value over time.
Strategically Raise Prices
While raising prices can be scary to entrepreneurs, the good news is that most customers expect increased costs for products and services during inflationary times. Keep an eye on your market, and consider steady, modest price increases to stay in line with market rates. One trap business owners can fall into is to hold prices steady for too long, which will eventually require a significant upward adjustment that can surprise customers.
Some other pricing strategies to consider include:
- Take a page out of big consumer staple brands and offer slightly less product or service for the same price.
- If you bundle services, think about unbundling or re-arranging bundled services to meet customer needs better.
- Offer “upsell” services such as extended warranties or subscriptions that can create value for your customers while adding a passive income stream to your business.
- Identify your core products or services that differentiate you from the competition and focus marketing spend and price increases on these “sticky” items.
- If you offer long-term contracts to customers, consider shortening contract lengths or adding variable pricing and automatic price increase mechanisms.
You don’t have to make drastic moves. Even an extra one-or-two thousand dollars a month in revenue can help pad your bottom line.
Pay Attention to the Labor Market
The latest Bureau of Labor Statistics report shows that the Great Resignation is still raging. A record 4.5 million employees voluntarily left their job last month. You can quickly find yourself out of step with the labor market as a business owner between a decreasing unemployment rate and increasing wage growth. Make sure you keep tabs on competing firms’ pay rates and do what you can to retain your high-performing employees by ensuring their compensation is in line with the market.
Remember that a hefty paycheck isn’t the only incentive to attract talent. A healthy company culture, career development opportunities, a sense of purpose, and other intangible benefits can go a long way to keeping employees happy.
Root Out Operational Inefficiencies
While reducing costs and increasing efficiencies should be ingrained in every entrepreneur’s business cadence, it is essential to consider during rising inflation. Every dollar you save goes straight to the bottom-line profitability of your business.
For example, can you renegotiate pricing with your suppliers or sublease office space you don’t need? Are there ways to automate specific tasks taking up too much of your time? By redoubling efforts to reduce costs and increase productivity, you can strengthen your business to weather the storm of coming inflation more easily.
Lock In Long Term Contracts
Variable costs make it difficult to forecast future expenses for your business. In addition to reducing current expenses, another way to fight inflation is to lock in long-term pricing with strategic partners. Anything you can do to obtain long-term fixed-price agreements will go a long way toward ensuring the lasting health of your business in an inflationary cycle.
If you rent your office or manufacturing space, consider negotiating a long-term lease extension in exchange for locking in a low rate. Evaluate your most important suppliers and see if you can negotiate longer-term fixed price agreements. These contracts will ensure a steady supply of materials and help ease the burden of inflation by keeping prices consistent.
Prepare Your Business for Inflation
Regardless of your industry, inflation can wreak havoc on any business. However, by taking a proactive approach, you can reduce the effects of rising inflation and get a leg up on your competition. By making a few simple changes to your business and implementing the strategies above, you can be prepared to survive and even thrive in the months and years ahead.
About the Author
Andrew is the founder of Wealthy Nickel where he writes about all things personal finance. He has a passion for helping people pursue financial freedom through saving money, making money, and building wealth. Andrew documents his family’s journey to financial independence through side hustles while raising 2 kids on a single income
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