With inflation currently dominating the headlines – and the OECD suggesting rising prices could be here to stay – many entrepreneurs will be wondering what impact this might have on their businesses.
The word ‘inflation’ conjures up images of rapidly soaring prices, and people pushing wheelbarrows of cash to buy a loaf of bread in 1920’s Germany. The kind of inflation we are currently experiencing however, as a consequence of the government stimulus packages throughout the Covid pandemic, does not mean business has to stop however.
So, what strategies should businesses be considering as we enter a potential inflationary period?
Keep calm and carry on
First and foremost – it might sound obvious, but don’t panic. Too many businesses make the mistake of assuming the worst, and take risky measures to mitigate. The International Monetary Fund recently remarked that inflation should ‘return to its pre-pandemic ranges in most countries in 2022’.
Until then, there are still business moves you can take to secure your success.
Knowing your cash flow is vital for any business, but inflation can make it tricky to assess your spending power. Deducing your real income (your net income against the inflation rate) can yield a more accurate figure, giving you an understanding of what you can and can’t do with the money your business has.
Reassessing your place on the market might not be the most exciting move to take, but it helps you take stock at a critical time.
If prices have gone up in your sector, this may have a knock-on effect on your expenses – especially if you have to regularly purchase materials. For this reason, inflation may actually make it more profitable to buy in greater volume if you can.
Similarly, long-term contracts can help you and a vendor – they need the extra money, while you can also negotiate a fixed price that will stay static across inflation levels.
Read more on the benefits of these strategies here.
Passing the costs on
On the topic of costs, every business knows the pressure to increase their prices in response to inflation and share the financial burden with customers.
This comes with risks however, as you may alienate customers if you simply raise your prices. Thinking long-term too, you want to make sure that when prices stabilise, you still have a solid customer base and passing on costs may not serve you well with that. It’s also worth considering, if you’re competitors are hiking prices, and you aren’t, might there be an opportunity to actually grow market share? Thus potentially offsetting some of the costs from inflation and putting yourself on a good footing for future success.
Business opportunities in an inflationary period
It seems counterintuitive, but some sectors of the economy may actually benefit from inflation and as entrepreneurs, we need to find the opportunity in every scenario.
Business magnate Warren Buffett named real estate as one such sector. In real estate, rent costs rise with inflation, but mortgage costs are usually fixed. As demand for real estate does not go down during inflationary periods, people are willing to pay increased prices. The lesson here is again that having your costs fixed long-term, means that as prices everywhere else rise you find yourself at a strategic advantage.
Healthcare and energy are other vital sectors, so their inelastic demand allows for increased profits during inflation. The Nasdaq Stock Market has also revealed three stocks that perform well during inflation. Two of these (Deere & Co and Caterpillar) are heavy equipment manufacturers, the third being timberland company and real estate investment trust Weyerhauser.
So, take a look at which sectors perform well through inflation and seek out the entrepreneurial opportunities available!
Riding out the storm
With this inflation seeming to be temporary for most countries, the forecast looks brighter than you may first think. It is still important to make the right moves so that your business can benefit. Disaster is not looming ahead – but inflation provides a good chance to reassess your spending power and negotiate deals, while effortlessly handling price increases. For further tips on beating inflation with your business, check this article from the Economic Times.