Some companies are choosing to respond to inflation by simply “waiting it out” and hoping it doesn’t inflict too much damage on their bottom line. But that approach tends to fall short in a couple of ways. First, doing nothing likely means your company, customers, and profits will suffer. Just as importantly, taking no action can leave you and your employees feeling helpless.
A better approach, which can address both of the failings of a “sit tight” mentality, is taking action to reduce the impact of inflation on your business. That can include everything from educating yourself on inflation and why it occurs to contacting a business insurance company like biBERK to make sure you’ve got adequate coverage for assets that now have a higher replacement value.
What is inflation? Why does it occur? Many (perhaps most) people can’t answer those questions other than to say it makes a trip to the grocery store more expensive.
As a business owner, you may find it helpful to learn a little more about this powerful economic force.
The inflation rate measures how much the cost of goods and services increases over time. It’s calculated using the price of a specific set of goods and services as captured in the Consumer Price Index, Producer Price Index, and others. Economists talk about it as a percentage. For example, the current inflation rate is a little over 8%.
The frustrating thing for people affected by a rapidly rising inflation rate is that although governments understand it, inflation typically doesn’t respond quickly or precisely to steps they implement to reduce it. Plus, rapid deflation and the sudden price decreases that come with it can adversely affect the economy by increasing unemployment and producing other undesirable outcomes. Consequently, governments have to be careful in how they counteract inflation.
As for our current high inflation rate, many economists attribute it to the reopening of economies worldwide in the wake of the COVID-19 pandemic. To reduce the financial “squeeze” on businesses and consumers, the U.S. Federal Reserve is working to bring inflation down to around 2%. How quickly and effectively the Fed can achieve this objective remains to be seen.
How to Protect Your Business From Inflation
While there is nothing any company can do to exempt itself entirely from the effects of inflation, there are actions you can take to at least shield your business from them, including:
- Automating business processes. Most companies have tasks currently performed by employees that apps and other business tools can complete faster and more accurately. Automating those tasks means they can be done more cost-effectively.
- Improving cash flow. Paying more for materials due to inflation can drain a company’s cash reserves, which is unsettling for any business owner. You can offset this effect to a degree by focusing on collecting outstanding debt and working with your customers to obtain payment on invoices more quickly.
- Reviewing service contracts. You may be paying more than you should for the services your business uses. If so, it can be helpful to renegotiate those contracts or find other providers. Every bit you save adds up and can help offset inflation-driven price increases.
- Assessing your supply chains. Supply chains, like service contracts, can become bloated over time. You might find in reviewing yours that you can save a significant amount of money by making changes in where you obtain your raw materials, parts, supplies, etc.
- Evaluating your business insurance coverages. Inflation can drive up the replacement cost of business assets. The last thing you need right now is to suffer a covered loss only to discover that your policy limit is lower than it should be, and you’ll end up with an out-of-pocket cost. Now is a great time to reach out to your insurance company to talk about your policy limits and adjust them if appropriate.
Don’t Get Overwhelmed by Inflation
A high inflation rate hurts everyone. But you can minimize the financial pain by being proactive in operating and protecting your business.