Why is inflation a concern for businesses and consumers? Consumer prices increased a huge percentage over the previous year. The cost of fuel, transportation, medical and dental care, hospitalization, and other items and services that people purchase daily are all included in the Consumer Price Index. Since 1982, this is the largest 12-month rise.
Most businesses will be impacted by price increases for consumer items sooner or later. If you own a restaurant, rising food prices will immediately affect your bottom line. If you manage a fleet of delivery vehicles, increased gas prices are already impacting your daily process. Additionally, rising energy, commodity, and shipping prices have hurt manufacturers.
The producer pricing index (PPI) has increased by 10% since last year. The wholesale inflation rate has never been higher than it is today. The U.S. Labor Statistics Bureau said February 2022’s total energy and food expenditures increased far beyond February 2021’s.
Inflation can have a substantial . Even though you might be able to withstand some temporary price increases, you’ll eventually need to make some price adjustments to stay viable. But if your competitors delay their price hike, they’ll have an immediate competitive advantage. In the end, you may lose clients and market share.
You will choose whether and how much to increase prices based on the demand for your products or services, market trends, client loyalty, and how long high inflation rates persist. The amount you can raise prices has a cap, even if you do so successfully. So how do you continue to turn a profit and play between your business and inflation?
Tie Compensation to Performance
The first step is to reexamine your cost structure to locate potential opportunities for cost savings to offset expense growth. This is one of the smart ways to balance business and inflation. Unfortunately, this can be difficult for businesses that have already reduced expenses because of the COVID-19 pandemic.
Payroll is the best place to start. If the pay for some critical roles increases, you may expect an increase in productivity from those employees. Check the productivity levels of those employees to see if there is a relationship between salary and output.
Next, assess the efficiency of your performance assessment procedures. That entails having in place job descriptions that are clear and comprehensive and include performance measures and yearly goals. Regular performance reviews must be conducted concerning these goals. Collect the results. The best method to increase productivity is through accountability. If you do not know how to work with this aspect it is wise to hire an accounting firm like Hess Financial Solutions to better implement this step. It may sound like another expenditure but failing in this step entails bigger expenses in the long run.
Aim for Optimum Staffing Levels
The performance evaluation procedure may reveal opportunities for workforce reduction. How? Discuss whether they would be prepared to accept more responsibility before awarding current employees a raise. There may be some tactical downsizing as a result of these discussions.
When analyzing payroll costs, keep an eye out for benefits that employees do not seem to value. Some perks, such as sporadic free lunches and business events, can be discontinued without facing any resistance from the workforce.Even while offering extensive health benefits is typically a solid strategy for luring and keeping staff, think about if you might be going overboard. For instance, do you subsidize health benefits higher than comparable local employers?
Additional Saving Possibilities
There are other areas besides payroll and benefits where you can do cutting to stabilize your business and inflation. Take into account these well-liked savings options:
Partnering with independent contractors
Companies are typically discouraged by labor rules from turning employees into independent contractors. The IRS may reclassify independent contractors as employees under specific circumstances, which might be expensive for a company.
However, you might be able to hire independent contractors to boost your personnel or take the position of departing employees. Generally speaking, hiring freelance help is more flexible than hiring employees because you can hire contractors as needed at a variable price.
Renegotiate Service Agreements
List all of your service agreements. A few examples are the telephone, the Internet, software licenses, equipment leasing, landscaping, housekeeping, security, insurance, and professional services. By 1) deciding to choose a less expensive competitor, 2) negotiating a lower price with your current provider, or 3) lowering your level of service, you can reduce these expenditures.
Collaborating with Other Companies
Large groups, such as trade associations or cooperatives, frequently possess greater collective bargaining strength than enterprises negotiating alone. Creating or joining a buying group may allow you to take advantage of cheaper goods and services. Some businesses even split significant overhead expenses like conference rooms, office staff, and office supplies.
Some businesses have boosted their safety stock levels during the past two years to protect against supply chain interruptions and benefit from volume savings. However, companies with high inventories use high operating capital. They also shell out a great deal of cash for storage, security, insurance, and protection against theft and obsolescence. In the face of today’s inflation, effective inventory management is crucial to sustaining profitability and cash flow.
Which Option Is Best for Your Business?
A precarious situation is emerging for business owners due to high inflation, labor shortages, and supply disruptions. What steps can you take to reverse these trends? Some businesses can raise prices for clients if there is a high demand, but only to a certain point. You’ll require more innovative coping mechanisms if high inflation rates continue. Hess Financial Solutions may offer guidance on pricing hikes and workable cost reductions for your company. We can help your business thrive despite the risk of hyperinflation.