3 strategies for an inflation-resistant business

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Inflation has been in double digits lately. Everyone understands that inflation means higher prices, but what does that mean for your business? We need to know where inflation comes from and what it is to answer this question. This will help you prepare your business and do as much as possible to make it inflation resistant. Below is a brief introduction to inflation and what you can do to avoid the pitfalls of running a business in an inflationary economy.

What is inflation?

Nobel Laureate Milton Friedman once said: “Inflation is always and everywhere a monetary phenomenon. It is always and everywhere the result of too much money, faster growth of money than output.” He meant too much money competing for goods, putting upward pressure on prices. Economists have traditionally viewed the money supply as the cause of inflation. In fact, inflation was originally understood as money losing its purchasing power.

But this is not a unanimous consensus, as all prices do not rise at the same rate. As we’ve seen over the past decade, some prices even drop with computers and smartphones. Devices improve every year, but the dollar price remains the same. People get more for their money.

Modern economists distinguish between “expenditure push” and “demand pull” inflation. The first means that prices are rising in production. In other words, your input costs start to rise, forcing you to raise your prices for customers as well. The latter is a reverse price increase, meaning that prices rise first on consumer goods and then pass back down the supply chain.

Related: 4 Ways to Protect Your Business from Inflation

What inflation means to entrepreneurs

Cost inflation will put pressure on your cash flow and profitability. As your expenses start to rise, you’ll need to raise your prices to make ends meet. The longer you wait to raise your prices, the greater the financial strain on your business. The problem, of course, is that the competition in your industry may not allow you to raise prices – it could be disastrous to do so before the competition.

Demand-side inflation means the opposite. Demand for your products increases and you can raise prices and still sell everything in your inventory. It will help if you raise prices much sooner than you think. Because you will need that money when you are trying to secure raw materials to maintain your production volume. Other businesses will also see increased demand and bidding for more information, driving up costs. The problem is that your income may end up being less than your replacement costs. So you can lose even though your margin on goods already produced has gone up.

Both situations are complex and require you to be prepared and act properly. Both cases ultimately mean that prices are generally higher and that the purchasing power of money is lower. In other words, even if you make a profit in inflationary times, that profit can buy you less and less. It costs less over time.

Related: 4 Ways Startups Can Beat Inflation

How to become inflation resistant

Inflation means that money loses value, so there is no way to avoid its effects in a market economy. But there are ways to position your business and its operations to avoid suffering the consequences of inflation. Here are three ways to think about your business to make it as close to inflation-proof as possible:

1. Position yourself to create value

Smart entrepreneurs are able to build their business by thinking primarily about the value they create. Cost comes second and is actually a choice. Deliver value to your customers and be the beacon that guides you in everything from product development, pricing and building production capacity to marketing. Value is not a dollar amount, but ultimately the satisfaction someone gets from using the consumer’s goods. The value is inflation resistant. Focusing on it also gets you closer to being inflation resistant.

2. Use contracts wisely

When inflation is around the corner, it makes sense to fix raw material prices but keep output prices flexible. In other words, as soon as you expect inflation, look to sign long-term cost-specific contracts with suppliers. Even at higher than market prices, this can be a profitable strategy as prices start to rise quickly. At the same time, renegotiate or prematurely terminate contracts with your customers to allow for price increases. You may want to consider including “cost plus” price adjustments in your sales contracts. This is not a suitable pricing method during regular times, but it can help you survive periods of high inflation.

Related: Why intelligent automation is the only answer to wage inflation

3. Don’t overdo it when prices change

Keep your head cool. It is easy to respond to rapidly increasing demand by increasing production. But this may not be the right answer if you suspect that it is not the customers who finally recognize your products as excellent. If it’s a demand pull, your input prices will soon rise faster than output prices. Smartly scale up production by using contracts to combat unnecessary inflationary ramifications.

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