With inflation over doubling this week from 0.7% – 1.5% this is a good time to explore how to combat its effects. Because while this may be good news for the economy as things open it is not purely a result of increased demand from reopening. Supply shortages across a range of key products are also causing issues, from computer chips to oil, Covid has had a deep impact on these supply chains.
With this in mind this article will lay out methods you may choose to employ in order to reduce potential negative impacts of inflation and maximise benefits.
WHAT IS INFLATION?
Inflation is defined as a general increase in prices and fall in the purchasing value of money.
HOW CAN IT IMPACT YOUR BUSINESS?
Inflation likely spells an increase in costs for your business internet, utilities and materials are all likely culprits without action. To add fuel to this fire your staff feel this as well with their weekly shopping for example so they may also want increases in pay or be less happy with their salary.
THE OTHER IMPACT THIS CAN HAVE IS IT INCREASES UNCERTAINTY.
Will consumers stop buying products and services?
Will the bank of England change the interest rate?
Will supply chains be further impacted?
And many many more.
All this makes planning really difficult, as it is tough to plan without knowing the terrain.
Steps you can take to limit its affect.
Where possible convert variable rate loans (or other adjustable debts) to fixed rate while the rates are still low. It currently seems unlikely that interest rates will change as we are attempting to promote growth. Despite this to much of a good thing could change this quickly.
Another way to manage your debts would be to pay off balance’s, as much as possible, on ones likely to be hit the hardest by interest rates increasing. For example, those with already inflated interest rates or those you are unable to change to fixed terms.
NEGOTIATE WITH SUPPLIER AND EXPLORE OPTIONS
Being loyal to your suppliers is always advised BUT practically must sometimes take over. Try to leverage you good relationship to get a good deal but do shop around just in case. Remember once the ship has steadied you can go back! You may also wish to explore price fixing agreements especially in volatile markets such as commodities. These typically get hit the hardest by inflationary pressures.
In times like these it is best to have a variety of potential suppliers to avoid being over reliant on one. If your main supplier has issues or closes what is your plan?
REVISIT YOUR PRICING STRATEGY
It may be necessary to pass on the increased costs to your clients if it east into your margins to much. Of course, you need to keep an eye on competitors to ensure you do not price yourself out of the market. It is also beneficial to keep your pricing terms open. As mentioned above from the buyer’s perspective they are likely to want long term contracts. This means you will have to find what works for you and your client individually.
It is advisable to plan any increases and do it marginally over the course of a longer period. The sooner you start this the less time you must wait until you back to normal profit margins. Again, be cautious not to price yourself out and focus on why you are the best.
REDUCE YOUR EXPENSES
You probably know better what works for your industry than this list but here are some common ones. If you are stuck reach out to your bookkeeper or accountant and they should be able to help.
Possible options to explore are;
· Utilities (Electric, gas, phone, and internet)
· Hire Interns
· Hire Freelancers
· Relocate to a smaller, less expensive working environment
· Use Virtual Offices (Allow employees to work from home)
· Renegotiate with your suppliers
· Eliminate Finance Charges
· Review your professional indemnity insurance policy
· Conduct timely technology and services audits
· Automation where possible – click here see our article on digitisation for other benefits
Use excess money or borrow (at good rates) to buy bulk of stock, materials, or other potential costs before the price increases. BUT be careful not to overdo this as there are any number of potential constraints that lead to downsides of this method.
If you are renting and cannot or do not want to get rid of your offices use a similar technique to point 1. Negotiate better terms and try and get long contract terms to see you through this period. Just be careful to not shoot yourself in the foot further down the line should you wish to move.
Collect on outstanding debts especially those past the due date. This will not only help with other points but stand you in good stead for the future to keep cash moving. Click here to see more on the importance of cash flow.