The past two years have been some of the most challenging times for businesses. With the global pandemic closing travel borders, forcing lockdowns, and changing people’s lifestyles, business owners had to rethink their operations. Today, while restrictions have eased, they face a new problem that requires proper financial planning—inflation.
Inflation stood at 8.3% in August 2022. While this marks the second straight month of moderation, inflation remains a big problem. For businesses, this means higher commodity prices and decreased customer purchasing power, which can put a massive dent in your finances. As such, you must be prepared and know how to adapt to the economic situation to stay resilient.
If you’re having difficulty navigating these trying times, here are seven tips to help you beat inflation and prepare your finances.
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One of the immediate effects of inflation is higher prices, which you may notice with suppliers. Naturally, the more expensive your raw materials and inputs are, the lower your profit margins will be. Thus, reviewing your prices during this time is critical to ensure that you still have a healthy bottom line.
That said, you risk driving away customers if you suddenly raise your prices all at once. So before making any changes, you should analyze your product mix and determine if you can justify price increases.
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Aside from price adjustments, cost-cutting is another way to preserve your income during economic downturns. Start by auditing your spending to know where your money is going. Make sure you carefully review each part of your budget to identify areas where you can cut back and reduce expenses.
Generally, some possible cost-cutting measures include:
Again, remember to think of your business goals before jumping ahead to cut any costs. As much as you want to be more frugal when there’s high inflation, you should still think of ways to grow your business. Thus, the key is to retain your strategic expenses and cut the non-strategic expenses.
If your business has some outstanding debts, it can be extra challenging to repay them during inflation. Unfortunately, delaying payments can cause more financial problems down the line. So if you still have a long way to go based on a debt payoff calculator, consider refinancing your debt via debt consolidation.
Debt consolidation involves taking out a new loan with lower interest and using that to pay off your existing debts. It helps ease the burden of high interest rates and allows you to find more favorable terms. For example, loans usually come with fixed interest and longer repayment periods. These terms are more favorable than credit cards, which are notorious for accumulating mountains of interest over time.
With higher labor costs and the ongoing skills shortage, it’s also worth leveraging automation to protect your business against inflation. Investing in technologies may seem inappropriate when trying to cut costs, but doing so will be strategic in the long term. You not only reduce labor expenses but also increase efficiency and productivity by maximizing your team’s potential.
According to the 2020 In(Sight) Report from WorkMarket, 54% of employees stated that automation could save them around 240 hours a year. This roughly translates to two hours per workday, which they could use for more high-value activities instead of repetitive tasks. Such an impact will be beneficial in the long run as it also improves employee satisfaction and retention.
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As a business owner, you’ve likely also made some investments in stocks, bonds, or other financial products. If so, now would be a good time to review your portfolio and check if you need to make any changes. Perhaps you want to move some investments into more stable options if you have a low risk appetite.
For example, real estate is known to be stable during inflationary periods since property prices and rental income also go up. Other options include gold, commodities, and treasury inflation-protected securities (TIPS). In any case, make sure you speak with a financial adviser first to ensure you consider long-term implications.
Stockpiling is another way businesses can combat the effects of inflation. The idea is to stock up on core materials as early as possible to avoid spending more as prices increase over time. If possible, you can also lock in long-term contracts with suppliers for wholesale discounts. In any case, you’re effectively using your inventory as a hedge against inflation.
Generally, stocking up is a great way to ease the burden of high costs and prevent shipment delays. The latter is especially important, given the supply chain disruptions caused by the pandemic. Of course, it’s worth noting that this strategy isn’t suitable for all businesses. Thus, you should check metrics like your inventory turnover ratio and days inventory outstanding to gauge whether it’s working.
Economic conditions are constantly fluctuating, so it’s worth noting that high inflation periods won’t last forever. But at the same time, you never know what may happen due to the uncertainties, so it’s also essential to prepare a contingency plan to address challenges. For example, setting aside an emergency fund ensures you always have access to cash.
Smart financial planning is key to weathering the challenges brought about by inflation. Fortunately, this is what we specialize in at Prudent Financial Solutions. With our expert team to help you out, we’ll make sure you keep your company’s finances in check and build a solid plan for repaying debts. Call us today at (877) 612-3249 to get started.