In October 2021, the Bureau of Labor Statistics’ Consumer Price Index reported a 6.2% increase in inflation over the past 12 months, the highest 12-month increase since 1990. While inflation can affect your business in many ways, the thing to remember is not to panic. Take a look at how inflation might impact your company, then make a plan to manage inflation and minimize its effect.
The Cost of Supplies and Inventory Increases
As the cost of products goes up, the amount you’ll need to pay for your inventory and supplies you need to operate your company will go up. That can mean higher costs for your business overall. You can counter rising prices in a few ways.
One option is to increase the price of any services you offer or products you sell. If you’re paying more to acquire the materials needed to produce your products, it makes sense that they would cost more for the end customer. Of course, you can only go so far when raising prices. If you increase the price too much, customers might decide to find another company to work with or might stop purchasing from you altogether.
Another option is to purchase supplies and inventory in bulk before the prices increase dramatically. If you’re going to go this route, it makes sense to stock up on items that won’t spoil or that have a long shelf-life. For example, purchase larger quantities of the materials you need to package your products or hardware you use to assemble your products.
While buying in bulk can save you money in the long run, it can be challenging to come up with the cash to pay for a larger than average order. You might consider using company reserves to fund a bulk purchase or getting a loan to cover the purchase costs.
Employees Might Ask for Higher Wages
Employees are also likely to feel the effects of higher prices and might ask for more money to help them afford a higher cost of living. In some ways, the demand for higher wages is already apparent. In the second quarter of 2021, wages for fast-food workers went up by 10%, the highest increase in some time. One factor contributing to the demand for higher wages was inflation, another was an increased turnover rate. Fast food restaurants are raising wages in an effort to attract and retain workers.
If your team is asking for more money or you feel you have to increase the starting salary for entry-level positions at your company, and you’re concerned about how increasing pay will affect your bottom line, there are options.
You can try to negotiate with employees to see if certain benefits, which might be lower cost to your business, appeal to them. For example, an employee might be willing to accept a better health insurance plan in place of a wage increase. Another option is to offer your employees bonuses based on the company’s or the employee’s performance. Offering bonuses can lead to an increase in productivity, which benefits your business while increasing employee engagement.
Additionally, you can create programs for your employees that help them develop their skills and create a path for advancement for them. That can mean introducing a tuition reimbursement plan or creating a leadership program that primes employees for future management roles.
Financing Can Become More Expensive
Another effect of inflation is that borrowing money can become more costly. As interest rates increase, the amount you need to pay for a loan goes up. If you have loans with adjustable rates, you might see the rate go up the next time it adjusts, leading to a higher monthly payment.
One way to counteract rising interest rates is to refinance an adjustable-rate loan to a fixed-rate loan if necessary. It’s also a good idea to apply for financing before rates increase.
Inflation isn’t all bad news for financing, though. If you currently have a fixed-rate loan or get one before rates rise, the value of your debt is likely to decrease faster as inflation goes up.
Inflation doesn’t have to impede your company’s growth. The virtual CFOs at New Direction Capital can help you develop a strategic plan that counteracts the effects of inflation and that paves the way for profitable growth. To learn more, contact us today.