What About This Inflation?
This interest rate increase by the Treasury this week was the largest increase since 1994. It was .75 percentage points. The Fed will continue to raise these rates at what is expected to be the most rapid pace in decades.
Inflation is at a 40 year high. We all see prices soar at the pump, grocery stores, and well, everywhere.
There are some silver linings.
1. We live in an area were the government bubble provides affluence. Prices are up, but so are wages in this area. People here will continue to spend.
2. Our area lacks the manufacturing businesses (unlike the mid-west). People here expect to keep their jobs and not be laid-off. They will still have money to spend.
3. Many, who couldn’t get projects done during Covid, will be looking to do that work now.
4. Everyone has an awareness that things cost more. There should be less resistance to your higher prices.
5. People are receptive to good, positive marketing during inflationary times. These are the times to be positive about your future and your profits.
We have experienced these situations in years past (many of you will remember). The rules for successful businesses are the same now, as then. Keep your company financially healthy and maintain your profit percentage. This is not the time to cut prices or provide discounts. Be aggressive in raising your prices to keep pace. Do not put off doing what I am suggesting. Inflation is moving very fast. You do not want to get behind the curve.
First, because production costs have gone up, it is vital for you to adjust your selling prices accordingly. This will help you maintain the same profit margin level as before this time of inflation.
To do this, calculate the exact percentage that the cost of producing one of your products/services has gone up. Then increase the price of that finished product by that same percentage. We will be increasing our fees this coming quarter to maintain our profit margins. You must do the same. We can help you determine what percentage you will need to increase your pricing. For clients we have helped with these numbers recently, we have seen increases from 9% to 21%, and some have had to go higher than this. Some clients involved in the transportation industries are raising prices to almost double, because of fuel prices.
If you offer various products/services at different price points, calculate the production cost percentage increase of each product/service. Then adjust its sale price accordingly. This will help you offset rising business costs so you can maximize their profit margin, and maintain the same level of quality of their services/products for your customers.
Second, purchase materials in bulk ASAP. For construction or other product sales, watch your cost of goods. When you see a drop in one sector, try to buy ahead those items that will likely increase along with the inflation percentages. Avoid waiting until your next purchasing cycle, buy as soon as possible. Inflation on these items could continue to increase for the near future. So, if you buy raw materials in bulk now, you will limit the impact of inflation on the overall cost structure of products/services offered to your customers.
Think about it — say you regularly purchase $10,000 worth of products on the first of every month. If during the next month, inflation causes those products to go up by 7%, that is an increase of $700. That $700 could have been put toward marketing to help you sell more during these times.
Third, do not pay off or pay ahead on any fixed rate loans. You borrowed that money at a low rate that we will not see again for some time. Do not pay off mortgages, car loans, or other business loans with your cash. You may need your cash to buy materials before prices go up.
Fourth, your financial statements are more important than ever. The comparatives and trend analysis you receive from us will tell you if you have raised prices enough. Then adjust accordingly. Be aggressive in collecting your accounts receivables Do not let customers get behind. No one wants to do collections, but it will be important to do that now. Take discounts, if allowed, on your accounts payable, but do not pay them until they are due. Cash flow is important. It will give you flexibility.
Call us. Email us. We can offer advice to help you navigate through this period. Our clients are the most resilient entrepreneurs. Not one of our clients lost their business during Covid. This is a tribute to all of you. Inflationary times may present a challenge. My experience in past similar times, is that they make small businesses stronger.