Nobody knows how long the current inflation wave will endure, but a poll of economists conducted in the summer of 2021 suggested that it may last for years. More recently, the Federal Reserve of the United States suggested that the current wave of inflation may not be as “transitory” as previously thought.
When organizations and lenders assess performance risk and expectations for 2022, earlier developing patterns must be considered a permanent element of the business climate in 2022. It is unrealistic to expect inflation to be temporary at this time, and firms will need to build strategies to prepare for and manage an inflationary phase.
The traditional reaction to inflation is to choose one of three unappealing options. Managers might irritate their customers by raising prices, irritate their investors by decreasing margins, or irritate almost everyone by cutting corners to save money. When faced with this trilemma, most managers raise their rates and then look for creative ways to deal with the ensuing drama.
What to do?
Put any spare funds into accounts that pay interest.
Interest rates have been so low for as long as many of us can remember that it didn’t matter whether we kept our money in a regular or interest-bearing checking account.
However, the environment is shifting. The Federal Reserve is expected to raise federal funds rates (the rate at which commercial banks borrow and lend excess reserves to one another overnight) three times in 2022, with rates expected to reach 2.1 percent by the end of 2024.
Although this raises borrowing costs, it will eventually increase interest-bearing asset distributions. This will most certainly take some time, but when interest rates rise, you should start putting more money into interest-bearing certificates of deposit, money market, and savings accounts; because the returns will begin to matter.
Re-calibrate and de-clutter your portfolio.
This option can be implemented in a variety of ways by businesses. They can bundle or unbundle current items to develop new value propositions or expose clients to cheaper price points for disaggregated goods and services.
They can also add less-expensive alternatives or, counterintuitively, higher-end products that make the present product line appear more affordable, depending on what they have in their R&D pipelines or how flexible their production capacity is.
Lock in long-term agreements
Lock in a longer-term supply agreement with your vendors if they are willing. Discuss a longer-term lease with agreed-upon, set increases with your landlord if you want to stay as a renter. The same is true for higher-paid employees: Consider signing a contract to cement your partnership.
These adjustments will help you better budget and manage your finances by providing more control over your main fixed costs over the next few years.
Reposition the Brand
Most offerings are overvalued or underpriced — in some cases dramatically — concerning the value, they bring at any given time. Managers can use a wave of inflation to fix these misalignments in their product positioning.
A price cut can make sense when a company is spending a lot of money on marketing to sustain or prop up a value proposition that is becoming increasingly shaky. This might happen when a product loses its competitive advantage or is overpriced from the start. Maintaining that position becomes riskier as inflation rises. The corporation can handle this challenge by cutting marketing costs while simultaneously lowering the price to support a more realistic placement. Depending on the severity of the changes, they may potentially result in increased profitability.
Invest in technology
In these inflationary times, businesses are doubling down on technology spending to get more work done with the same or fewer personnel while keeping overhead low.
They’re putting money on automation in their factories, and also self-service consoles in their stores and restaurants. RFID and barcode systems for inventory control, and artificial intelligence-driven automation to answer inquiries and complete workflows without requiring human interaction.
Replace the Price model
Many organizations have already investigated implementing new pricing methods inspired by the success of subscriptions and “my-product-as-a-service” models. The immediate need to respond to inflation provides them with a compelling motive to put these strategies in place right away, avoiding the classic trilemma of settling for the lesser of three evils.
Companies across a wide range of industries have proved that changing how they charge their customers has had various benefits over the last decade.
Examine your investments.
Depending on your risk tolerance and income, shifting part of your investments into commodities like gold and silver, which have historically performed better during inflationary periods, may make sense — though these come with additional risk and aren’t always the greatest option.
Increase your holdings in large-cap equity funds since the profits earned by well-managed companies (whose stock these funds own) tend to stay up with rising costs.
It will be critical for business owners to get past the inflation excuse and develop an analysis and a strategy.
Feel free to contact us to learn more about setting up a business strategy or filling out your taxes.