As we move into a more inflationary cycle at a macroeconomic level, the pressure is increasing for many businesses, and SMEs are more vulnerable. In May, the inflation rate in the Philippines reached a 42-month high of 5.4 percent, bringing five-month average to 4.1 percent. According to economist and Albay rep. Joey Salceda, inflation may even shoot up to 8 percent as the conflict between Russia and Ukraine continues.
Inflationary pressures cause supply shortages, limiting the supply of finished goods. Immediate shortages are typically addressed by bidding up prices, expediting shipments, hiring additional workers, or paying overtime. Obviously, these measures themselves increase costs. Companies across all industries are struggling to absorb rising prices in the face of increasing labor costs. At the same time, they require additional capital to expand and advance cost-mitigating measures such as digital transformation initiatives.
With the looming effects of inflation, as well as income loss due to the COVID-19 pandemic and supply-chain issues, rethinking strategy and preparing for higher inflation can put businesses in a superior and more resilient position for long-term growth.
Here are some steps that small businesses can take to mitigate the impact of high inflation:
- Strengthen Products’ Pricing Placement
This measure requires the business to assess product value to consumers rather than production costs. While the business cuts costs, other costs that enhance or add value to the product should be priced adequately -either higher or lower depending on consumers/clients’ perception of what has value in the product or service.
Before raising the costs, the business will need to research the competition and use their prices for benchmarking. Improving the uniqueness of products/services through enhancements, bundling, de-bundling, or branding will provide justification for the price increment. Management will need to Inform customers about the increase and why it is necessary. Transparency will help customers adapt to the new situation, and prepare for higher costs without compromising their loyalty to the business.
- Analyze the Products and Revenue Mix
There is never a better time to examine and optimize the products your company sells than during an inflationary period. Analyzing product or service streams, comparing performance over time, and getting a good picture of the business and available options in different geographical markets, client types, and distribution channels is the most effective approach.
The goal of streamlining your business during inflation is to reduce costs while maintaining profitability in a slowing market. To that end, a company may shift its production to focus on higher-margin products and services, thereby protecting its bottom line. Before implementing the change, evaluate its potential short and long-term effects and understand how it will affect the business’s future.
- Assess the Supply Chain Risks
A modern business supply chain can be extensive and complex. The process by which a product moves from raw materials to manufacturing to retail is fraught with risks. Protecting your supply chain, especially if you deal in physical goods, is an effective way to prepare your business for inflation.
The following are the most common risks to small businesses’ supply chains:
- Over-dependence on a single supplier
- Using suppliers with long lead times, such as imports
- Products that are heavy, bulky, hazardous, or perishable and are difficult to store
- Materials that are routed through a just-in-time supply chain
In an inflationary environment, there are numerous steps you can take to mitigate supply chain risks in your business. Some of these steps may include:
- Creating an alternate supply chain rather than simply finding a different supplier
- Stockpiling critical supplies with a low holding cost
- Implementing an expedited supply strategy
- Examining stock levels at each stage of the JIT supply chain
- Maintain a healthy inventory
A healthy inventory can help businesses combat inflation during times of rising prices. Similarly, when prices are falling, it is more profitable to keep a minimum inventory. Understanding your inventory levels and keeping them in line with market demand will allow you to make more profitable decisions. It also helps in the improvement of internal accounting control, business oversight, and inventory management processes and accuracy.
Buying goods at today’s lower prices in order to sell them in the future at higher prices allows you to use your inventory as a hedge against inflation. Negotiate long-term contracts with suppliers to lock in today’s price for a year or more. If this isn’t an option, request a larger discount for purchasing in bulk today. This will boost your savings.
- Cash is always King, Save It!
Proactive business owners plan ahead of time for potential inflation scenarios. Use the ‘What If’ technique to consider various situations that could impact business. For instance, anticipating wage increases, higher material prices, and supply chain disruptions. When forecasting a scenario, consider how much money the company will need to get through each event.
Cash is always king. Do not allow customers to pay for your product or service according to only to their terms. A high inflation rate increases a company’s risks and hurts even more when its receivables become uncollectible.
