As regular readers of our blog, you are well aware of our recent focus on inflation. And even more recently, the US Labor Department announced that inflation for December 2021 was 7%, the third consecutive inflation rate higher than 6%. And while there is some debate whether it’s “permanent” vs. temporary, the economic reality is that small business owners will need to grapple with both higher prices and (most likely) higher interest rates over the next couple of years.
The question is: Do you necessarily have to give in to these pricing pressures? Some companies may find it harder to pass higher prices onto their customers than others. So it’s important not to necessarily assume all prices must increase. Are there other ways to protect yourself financially? Here are some thoughts on the matter:
- Consider Putting Contracts Out to Bid: We all like doing business with people we like and trust. However, there are times where vendors may get lazy and quote prices that are better for him than they are for you and your company. It’s not malicious; rather, your silence can be perceived as acceptance. It is worth the effort to speak with all of your significant vendors and find out if there are more economical ways to do business together.
- Plug Up Leakages: Although more circuitously related to inflation, your bottom line may not be what it could or should be due to easy-to-forget-about leakages. For example, if you are a retail store owner, you could have shrinkage or lost inventory issues that you haven’t been able to address. In this example, purchasing an enhanced video system under a bidding environment will translate to good equipment in your stores and save you money as well. As another example, you may have subscriptions for software packages that you don’t need and/oor other services that you no longer require. You don’t want to waste any money, and it’s a good practice to have, in an inflationary environment or not.
- Assess Your Debt Situation: During the pandemic, many companies took out loans to fund operations and try to maintain normalcy. Interest rates were historically low; but now, the “experts” are saying that there will be higher borrowing costs for companies in the foreseeable future. So, if you have debt or other financing that must be paid off in the next 12-18 months, it would be wise to consider renewing terms in this current interest rate environment. Alternatively, if you don’t have much in debt, but you are anticipating a heavy growth or intensive cash-usage period in the next year or two, it would be wise to obtain some line of credit or even debt issuance to help maintain your profitability and market share.
- Don’t Get Lazy: It’s easy to do what everybody else is doing. But true leadership will involve going against the grain and making unpopular or unconventional decisions. If you base your business strategies on what you see in the news and what you read in the papers, it makes you a follower, not a leader. If you look at your cost structure and can limit price increases for your product and/or service, you will differentiate yourself from your other competitors who may be too afraid to follow a similar strategy. You should only change your pricing if your specific circumstances warrant it.
Take-away: Challenging times call for careful evaluation of all facts before making decisions. If you need assistance in determining your financial strategy or course of action in 2022, contact Brian or Scott at email@example.com.
Co-founders & Managing Partners