Ask owners what their challenges are, and they’ll say “cost of materials going up,” “I’m paying my employees more to keep them on board,” or “cost of fuel is getting ridiculous.”
On the flip side, any talking head on CNBC will say inflation is to blame for those issues business owners are facing. Inflation is intangible to business owners; it’s invisible. They can’t see it in the balance sheet or their bottom line, but they can feel the effects of it daily.
Back in March, inflation rose 8.5%, a 40-year high, and it doesn’t seem to be looking better as we inch closer to summer.
What is Inflation?
According to Investopedia, inflation is the decline in purchasing power of currency over a given time.
That’s just a really fancy way of saying the cost of your dollar isn’t getting you as much as it did yesterday.
What’s Causing Inflation?
There isn’t one thing to blame for the rise in inflation. Fuel costs, in addition to consumer goods costs, rose sharply due to the invasion of Ukraine.
Because of the Great Resignation of late 2021, some businesses tried to encourage their staff to stay by increasing their wages. This led to an increase in operating costs. Even stimulus packages took some blame, too.
According to the US Chamber, consumer spending on goods increased a whopping six-fold due to these stimulus packages. Couple that with supply shortages and you have an increase in demand with supply struggling to keep up.
How Will Inflation Come Down?
The Federal Reserve has raised interest rates and is looking to continue this trend throughout 2022.
The idea is to curb the urge to borrow with higher interest rates, which will limit spending for supply to catch up. Who knows what will regulate things back to normal; we’re not financial pundits for CNBC.
What Are Good Ways to Fight Inflation?
Manage by the numbers.
You should know how much it costs to run your business. Think about profit, too. Where should you be at the end of each month? Knowing how much it costs to generate a dollar of revenue will help you tremendously.
Pay down your debt.
Not only do you want to decrease how much you owe, but you also want to look at increasing what you’re allowed to borrow on your line of credit. You may want to increase your prices. Maybe not for your most loyal 20% of your customer base, but for the remaining 80%. You have to be aggressive with how much you’re paying down on your line of credit and term debt.
Implement a pay for performance plan.
It’s not commission-based pay either. You want to incentivize your employees to perform above and beyond what’s asked of them with two-tier profit.
After you know what it costs to run your business, and what your profit should be, then you can create a performance-based compensation plan. This is discussed more in a previous Forbes article.
Essentially, if your plan is to make $1 million a year, any money that is generated past that mark goes into a fund where you can then pay your overachieving employees more.
Fight Against inflation
We don’t know when the cost of living is going to come back down.
As fuel, materials, and wages continue to rise and employees are harder to procure, you need to ensure that you’re doing everything within your power to keep your business afloat.