We’d better start off by defining inflation since many of you may be too young to remember and may not have taken economics in college. According to Investopedia:
“Inflation is defined as a sustained increase in the general level of prices for goods and services in a county and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time. Put differently, as inflation rises, every dollar you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation.”
Why is that bad? Because inflation also compounds – a price increase on top of a price increase…as of June 2018 the 12-month rolling inflation rate was 2.9%. Let’s say it stays that way for 5 years. Today a cup of cup of coffee is say $3.00. A year from now it will be $3.09 ($3 times 1.029), at the end of year 2 it will be $3.18 ($3.09 times 1.029), and so on until the end of year 5 when it costs $3.46.
What if inflation were 10%? At the end of year 5 that $3 cup of coffee would cost you $4.83! In just 7 years and 3 months, the price of your coffee would have doubled!
Now if inflation were as high as it was at its peak of 14.76% in April 1980, that $3.00 cup of coffee would cost $5.97 (twice what it does today) in 5 years and after 10 years $11.89! Yes, $11.89!
FYI, when I was young a cup of coffee at a restaurant was 5 cents. Yeah, a nickel! What does a nickel buy today – nothing and that is the point of why you need to know and worry about inflation.
We’ve been talking about a simple cheap cup of coffee, think about an iPhone, an airline ticket, a car, or a house – OMG!
So what about inflation, its impact on your business bottom line and what you can do to thrive?
As of this writing, Inflation has not yet reared its ugly head, but just like skirt length and tie width inflation is cyclical.
Before, we discuss how to insulate your business from the possible coming inflationary tsunami about to hit shore, let’s look at some key economic indicators that confirm it is likely on our doorstep.
What Are The Telltale Signs We Are Headed Straight Into A Possible Inflationary Headwind?
- We are only three (3) months away from the longest bull market since the history of record-keeping. This current bull run just crossed the nine-year mark this past March (2018).
- In addition, in case you didn’t notice, interest rates on 30-year mortgages have been slowly but steadily rising along with corporate profits.
- With an unemployment rate at its lowest (3.9%) since 2000, the rate will mirror the unemployment rate set in the second half of the 1970’s, which also preceded a substantial inflationary period in the early 80’s.
- Finally, there has been an upward tick in house prices AND a shortage of inventory in many regions in the U.S.
All these things add up to a recipe for inflation, but what are you supposed to do? Is there anything you can you do about it?
If you really want to know and thrive, keep reading.
First, for the sake of discussion, there are many reasons to believe it won’t be as bad as in the early 80’s when the prime rate when to 21.5% on December 19, 1980, (when many businesses went bankrupt because of the high cost of capital), but inflation hurts the pocketbook and your bottom line no matter its significance.
So, How Can You As A Small Business Owner Prepare For The Inevitable Inflationary Squeeze Coming Ashore?
Here Are 3 Action Items That We Will Explore And That You Can Act On Now To Not Only Survive But Also Thrive The Impending Inflation Period Approaching.
- Get lean and mean – NOW.
- Negotiate long-term supply contracts.
- Obtain pricing reductions from your suppliers.
Get Lean And Mean – NOW – There Is No Advantage In Waiting
During the last nine years of the Bull Market, the business climate has been good for many businesses. However, most companies may have grown complacent or even lazy enjoying the good times.
Why rock the boat, when everything has been coming up roses and profitability, has been on a long-term upward streak? Well, due to the law of Economics, all good things eventually come to an end.
To hedge your bets, you should begin seriously looking at all aspects of your business to see where you can cut off dead weight, unproductive assets, and inefficient processes or systems. Do it now to get ahead of the coming inflationary cycle to stay afloat later.
This also means holding onto additional cash reserves to weather the storm and paying down, paying off, or terming out your variable rate debt.
These action items can help you harden your financial position, limit your risk and protect your flank against the day when inflation begins.
You have likely heard the adage that an ounce of prevention is worth a pound of cure? You can hedge against this with getting lean and mean – NOW.
Negotiate long-term supplier contracts
Most of your suppliers greatly value your business and would like to do more business with you over an extended period as possible. Call them up, tell them you are doing some budgeting and would like to talk about looking at longer-term supplier contracts to better manage your business and growth plans.
Do this now BEFORE inflation hits, or they won’t be interested in dealing with you when inflation is hurting them and the uncertainty about how severe it might become bars them from signing any long-term contracts that don’t include inflation clauses. Once the word inflation hits the news headlines, it will be too late to negotiate.
Obtain pricing reductions from your suppliers
We’ve saved the best for last.
While the first two ideas are “musts” for preparing for inflation, in the world of the 80/20 rule obtaining pricing reductions from your suppliers it the 80%’er. So make sure you get on this immediately as it will pay an annuity of long-term benefits and a huge hedge against the adverse effects of inflation.
How long has it been since you reviewed your pricing with your suppliers or payment terms?
We recommend giving them a call to discuss your long relationship and history of on-time payments.
Ask for a little bit of price reduction based upon your strong partnership.
They might adjust your rate card up to the next bigger customer level. They aren’t going to want to lose a good customer, so they’ll likely be willing to speak to you.
Ask For More Favorable Payment Terms
Asking for payment terms can give you a quick 1-2% discount over 10-30 days, which is equivalent to much higher savings.
For example, if you receive a 1% discount for paying in 10 days rather than your usual 30 (1/10 net 30), essentially you are receiving an annualized 18% return on your money. Similarly, 2/10 net 30-terms give you a 36% return.
Now, that’s hard cash with a long-term anti-inflationary benefit.
Everything we mentioned previously applies to general and administrative (G&A) expenses as well.
Negotiating lower prices like we discussed in the previous section is great but what if you have a large number of suppliers of your G&A expenses?
You probably don’t have the resources to call all those suppliers and enter discussions with them. Even prioritizing them by largest spend and calling the large ones first is time-consuming and may not be viable. Also, many small and medium businesses don’t have the volumes necessary to ask for discounts, so what do you do?
Wouldn’t it be great to combine your spend with other small and medium businesses to obtain lower prices based upon larger volumes? But, how? What if someone has done that for you? Wouldn’t you want to take advantage of the opportunity?
Great news – they have! Concerto Marketplace has done just that, not only with G&A products but also with commonly used services as well. Concerto Marketplace can become your one-stop shopping place for most everything in your successful hedge against inflation rearing its ugly head.
Inflation is not a matter of if but a question of when, so take the above steps NOW to thrive. Don’t wait until inflation strikes because when it does, it might be too late to do anything about it. So start today – Here’s to a more prosperous future!
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About the Authors:
JR & Liz are partners in Concerto Marketplace, a company which helps small and medium businesses saving money by combining their spend to get volume discount pricing on over 70 products and services with the objective of assisting them to increase their profits. JR is a CPA and has over 35 years of business management, financial management, and entrepreneurship experience. He can be reached at [email protected] Liz is an operational and customer service professional who has helped startups through Fortune500 companies be successful in implementing their core business strategies. Liz can be reached at [email protected]