Everything I need to know about inflation, I learned in grade school – Too much money chasing too few goods and services, supply and demand, etc. It does not get any more complicated than that.
Just as there are certain inviolable laws of physics (try jumping off the roof of your house and not hitting the ground), there are certain laws of economics that stay true no matter the circumstances. The law of Supply and Demand is one such rule. For most consumers, extra money in your pocket is going to create demand for something. When the supply of that particular product or service is limited, the price will go up.
As for our current economic quagmire, the Federal government, spanning two administrations, could not have harmed our economy more if it had tried. In March of 2020, the Feds started paying people to stay home (increased unemployment) and paid businesses to stay closed (PPP, EIDL, ERTC programs, etc.) This significantly reduced the products and services available for purchase while maintaining or increasing the discretionary dollars in most consumers’ pockets. Reduced supply + increased demand = inflation!
So how can a Business Owner survive and thrive in an inflationary environment? Here is a practical guide for items that you can do now or in the future to protect yourself and your business.
Pass Along Reasonable Price Increases
Around 80% of your customers will understand a reasonable price increase based on the increased materials and labor costs. You should closely monitor your COGS by comparing what it costs to produce a “unit” last year to what it costs to produce the same or similar “unit” this year. If your costs went up 10%, you could easily justify a 10% increase, and most of your customers will understand.
You may say that this is easier said than done. How are you to increase your prices AND increase your unit sales? Here is how:
Remember that your REAL competitors are also increasing their prices. If they are not, they won’t stay competitive for long. You should also look to increase your marketing and advertising budgets. With your increased prices, you need to temporarily roll 100% of your increase in profit margin into new business generation. This environment will make consumers re-evaluate their supplier/provider relationships. Make sure they can find you at the top of the search list!
Do NOT Grant Across-the-Board Pay Increases
This is the wrong strategy during volatile times. Many business owners want to keep their employees, so they grant a straight percentage increase for them. This sends the wrong message to your hardest-working staff. You should target your salary increases to your most influential people.
Reward Your Producers for Productivity
Every business has more productive and less productive employees. Make sure you reward your best staff by setting up temporary incentives that reward efficiency and productivity. Make these incentives fun and meaningful. Create a visible way to track this productivity. You may find that a mediocre producer finds a different gear when work becomes a competitive endeavor. This also ramps up your business output to keep up with increased customer demand.
Poach your Competitor’s Best People
So, certain companies will resist increasing their prices and attempt to keep their compensation expense as level as possible. These companies are typically the ones that are providing less perceived value to their customers and are afraid that any pricing disruption to their clients will send them elsewhere. This is your opportunity to upgrade your team!
Use the productivity incentives to lure away their best producers. If appropriately structured, these incentives will attract the right kind of people to your company.
Invest in Technology that Reduces Labor Costs
Sometimes, the upfront investment in technology will deter the business owner from making the leap. However, as staffing costs grow to consume a more significant percentage of your cash flow, the investment in technology becomes much less painful. In particular, look for technology that increases output per employee.
Get Rid of Expenses that Do Not Drive Productivity.
Now is the time to eliminate all wasteful and non-productive expenses. Whether that is canceling subscriptions to software apps or not renewing the lease on office space that no one uses, take a red marker to your operating expense budget and cut, cut, cut! You have already set up an incentive system to increase your employee’s pay. They won’t mind that they are not getting free soda or lunches.
Creating a More Agile Business
An inflationary economic environment can be an excellent and disruptive way to re-engineer your business for a healthy company. You can finally pass through long-overdue price increases, reward the employees that make your business successful, and hire experienced employees from competitors that are not as appreciated by their former employers.
The keys to surviving and thriving are
- Price your products and services fairly
- Create incentives that drive employee productivity
- Cut unnecessary waste and costs out of your business.
Contact CS CPA Group Today
Contact CS CPA group for an in-depth review of your business today.