Inflation may be happening and it is scary!
Picture credit: Geopolitical Intelligence Services
What is Inflation?
Inflation is currently the hot economic topic and featured hourly on many TV channels you happen to turn on. It measures the average price changes in a basket of commodities or services over time.
What does it mean to a Start-Up or a small to medium business that is already facing issues because of COVID-19?
It can either kill your company or it can offer opportunities for exceptional profits. The side of the curve you fall on depends both on what industry you are in and how agile you and your team are when it comes to adjusting. Investopedia has an article focused on the winners.
I was an Executive for an International Trading Company during the interest rate shock of the 1980’s. On one side, the Trading Company benefited hugely from the difference in interest rates between varying countries. As an example, we successfully bid on a World Bank Tender because our products were subsidized by Brazil’s Government at an interest rate of 3% per year for 7 years. Payment by the World Bank was a 90 day term and we were able to deposit the funds in NYC earning 10%+ .
On the other side, my spouse and a partner were trying to purchase a brownstone in NYC. After visiting over 20 banks, they finally got a mortgage at 18.5%! Fortunately that loan did not have a pre-payment penalty.
Picture Credit: SlideServe.com
My guess is that the current trend in the US inflation rate may level off and possibly decline again. However if it does not, you will need to be prepared.
Preparing your company for Inflation
1) Pricing
The key issue will be the accuracy of your financial numbers. As we pointed out in our Covid-19 blog post, your prices need to be based on your cost, not on what your competitor is charging. This means your cost numbers have to be as close to real-time as possible. The luxury of reviewing your costs annually or every 6 months no longer exists.
2) Debt
This is a good time to review both your personal and your company debt. Anything that carries a variable interest rate should be paid off or replaced with fixed interest rate loans. The major culprits are credit cards and working capital credit lines. On the personal side, in addition to credit card debt, you need to see what surprises your mortgage may have hidden in the fine print.
3) Other items to consider
Their are various other ways to prepare for or to take advantage of Inflation.
If you have a commodity raw material that your company depends on, do your research to see if you can buy forward. In the late 80’s and early 90’s, my company used significant amounts of Semolina flour and I was able to get a fixed price extending for 12 months.
Increasing your inventory on packaging material may allow you to skip a price increase or two. It also may result in getting a quantity discount.
If you have cash reserves, do not invest in long-term CDs. Instead go for the shortest term and that allows you to take advantage of rising interest rates.
Your Accounts Payable department should consider getting more extended terms from your suppliers now, while the going is good.
Picture Credit: Breaking Latest News
In Closing
Having managed businesses during times of inflation, my experience suggests that in the United States it will only be an economic phase. I do not think it will spiral into hyper-inflation as some of the financial cable channels suggest. If you run a tight ship and are aware of the issues, you will end up with a better company.
If you value your employees – make sure that their compensation stays ahead of Inflation. You want to keep them, so protect them!
Picture Credit: Twitter