Everything I need to know about inflation, I learned in grade school — too much money chasing too few goods and services. Supply and demand. It is not any more complicated than that.
Just as there are certain inviolable laws of physics, there are certain laws of economics that stay true no matter what. 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. 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 to protect yourself and your business.
Pass along reasonable price increases
Eighty percent of your customers will understand a reasonable price increase based upon the increased costs of material and labor to you. You should be closely monitoring your COGS by comparing what it cost 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 should be able to justify a 10% increase.
You may say this is easier said than done. How are you to increase your prices AND increase your unit sales? This is how:
Remember 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. This environment will make consumers re-evaluate their supplier/provider relationships. Make sure they can find you at the top of the search list!
Reward your producers for productivity
Every business has more productive and less productive employees. Make sure you are rewarding your best staff by setting up temporary incentives rewarding efficiency and productivity. Make these incentives fun and meaningful. Create a visible way to track this productivity. You may find 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.
Invest in technology that reduces labor costs
Sometimes, the upfront investment in tech-nology will deter the business owner from making the leap. However, as staffing costs grow to consume a larger 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 cancelling subscriptions to software apps or not renewing the lease on office space 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 employees’ pay. They won’t mind that they are not getting free soda or lunches.
Creating a more agile business
For a healthy company, an inflationary economic environment can be an excellent and disruptive way to re-engineer your business. You can finally pass through long-overdue price increases, reward employees who make your business successful and hire experienced employees from competitors who are not as appreciated by their soon-to-be former employers.
The keys to survive and thrive are:
1. Price your products and services fairly.
2. Create incentives that drive employee productivity.
3. Cut unnecessary waste and costs out of your business.
– CPA Chris Scoggin is owner of CS CPA Group, a taxes, accounting and advisory services firm serving Central Arizona since 2004. He can be reached at 520-568-3303 and firstname.lastname@example.org.
– This sponsored content was first published in the July edition of InMaricopa magazine.