Michael Pazzani
Inflation has been a popular topic of conversation lately, and rightly so. Over the last few weeks prices of various raw materials and commodities have surged and show no signs of slowing down.
The Federal Reserve – who is charged with managing inflation in the US – thinks the current inflation is “transitory”. The Fed is currently forecasting inflation to be temporary and rise to 2.4% this year, and then settle back down to around 2% – their average target %.
However, history has shown inflation can often be persistent and last years, as it did in the 1970’s and 1980’s. If current increases in inflation do last longer than the Fed is expecting, or even rise further as many others are anticipating, Company’s need to be prepared to operate in a potentially very different economic environment.
Business owners are often most concerned with growing their sales, but pivot your thinking to focus on growing profits
Here are some things to think about when inflation is increasing:
- Watch gross profit and operating profit margins carefully
Inflation can create margin erosion. Supplies typically become more expensive and the costs to produce products go up. Inflation can also create wage and salary pressures. Business owners are often most concerned with growing their sales, but pivot your thinking to focus on growing profits. Think about ways to reduce expenses and discover how to make your Company more efficient and productive. - Consider Raising Prices – but keep competitors in mind
If input costs are rising, it could make sense to raise prices and pass rising costs onto end users. Before doing this, however, you’ll need to have a good handle on whether your customers are willing to pay more for the same product or service, or whether they will look elsewhere because it's too expensive. A few questions to ask yourself; How do your businesses prices compare to competitors? How unique is your offering? How elastic or inelastic is demand? - Reduce floating interest rate loans and reassess capital structure
One of the tools the Federal Reserve has in its toolbox to combat inflation is raising interest rates. If inflation continues to rise, the Fed will almost certainly raise rates. If your organization secured a floating interest loan during the low interest rate environment, the interest rate on these loans will increase - potentially significantly. Pay down floating interest loans as soon as possible. If your Company has been thinking about funding a new project or initiative with fixed rate debt, now might a time to consider that as the cost of debt could be much higher in the future.
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