Inflation: A Businesses’ Hidden Expense

Canada’s inflation rate increased to 5.1% in January of 2022, the highest since September 1991. The Covid pandemic, raw material costs and supply chain problems all contribute to the hike in inflation.

No matter what business you are in, or what part of the world you reside in, inflation is universal and presents a significant threat to the survival of every business. A good business plan must include accommodations for inflation. Whether annual increases in profits, or a reduction in costs, inflation is an important factor that needs to be accounted for. It is often an intangible expense that is often overlooked in business plans ultimately leading to the failure of the business. It affects salaries, raw materials, production costs, contracted services and just about anything your business pays for.

In this article, I will address some steps you can take to account for inflation. These steps can be simply classified into two main categories: Increasing Profits & Cutting Costs. Although these steps may seem like things you should do anyway, how applicable each step is, depends on the developmental stage of the business or the type of business you run.

Cutting Costs

Automation: The earlier you can implement automation techniques, the lesser you will pay for the equipment (hardware/software) required. Inflation affects the price of equipment so each year the equipment will cost you more. Automation often results in reducing personnel and if so, this also eliminates salary increases driven by inflation. 

Cut Consumables: cutting the cost of consumables, even items that may seem insignificant, can add up to a reasonable saving per year that could offset some of the cost of inflation. That saving increases each year as those items would also increase with inflation so smart inventory management of consumables is a must. 

Shop Around: When it comes to regular business expenses such as insurance, power supply etc, you should always shop around. Many companies offer introductory offers in order to gain your business from competitors. All it takes is some time to shop around. Take advantage of this and you could make a large saving each year. 

Stock Up: If it is an option for your business, you could try and stock up on materials/products you supply. This has a benefit in two ways:

1. You can negotiate a better deal purchasing a larger amount of the materials at one time

2. If you can purchase enough material with a good shelf-life, you can avoid future price hikes for the same materials

Clearly this requires storage space and larger initial capital but long-term, if you have the means to stock up, this can offset some of the impact of inflation.

Increase Profits

Increase Prices: Price increases are a natural process of business and is done to keep in line with inflation. It is the most effective way of offsetting the cost of inflation, however, we are often reluctant to increase prices to remain competitive and retain our current clientele. Something to realize is that inflation affects everyone and price increases are inevitable. The key is to increase prices slowly and in increments e.g. inflation of 6% in one year could be applied in 2% increments throughout the year. This is less noticeable for customers and appears less significant. 

Redistribute Investment Revenue: Keep a close eye on where you are reinvesting in yourself. Make sure what you are investing in is making returns. This includes marketing, advertising, decoration, facilities, services etc. If you are investing in multiple areas, see which is not performing and either try another way of reinvesting or find another supplier of the service. Remember some methods of advertising are seasonal and may benefit from additional investment at certain times of the year. 

Expand Your Clientele: Clients come and go, so continually expanding your customer base is important. If you work in a business of contracts, consider introductory offers to attract new clients. If you work in a products based industry, consider something like a rewards program to keep people coming back. These techniques could also help acquire new customers through a referral program. Although introductory offers may seem like reducing profits, smaller profits to gain clients is still profit and in the longer-term, you may retain their patronage. 

Fighting the Inevitable

Many wise texts in various ways, have said it is pointless fighting what is inevitable, and inflation is no different. Many businesses have survived decades of market and economic fluctuations. Instead of fighting, a good entrepreneur can navigate inflation by future planning, pre-emptive action and continual market analysis. 

If you need help getting your business through the current hike in inflation, contact business coach David D’Silva today.