Top 3 Ways to Combat inflation!
What’s the deal with inflation?
Inflation is simple to understand! It’s the general increase in prices overtime. Before you panic, it's actually a very common occurrence in economics. However, as we know, sometimes inflation can get too high, meaning that prices are increasing too rapidly causing a negative impact on consumers.
In fact, the federal reserve has already implemented 4 rate hikes to combat inflation. But the price for things like gas, food, and even airline tickets are still rising.
So, how do we solve it?
Here are the top 3 things you should do to combat inflation as a small business owner:
1. Pay Attention to Cashflow
Cash flow is the amount of cash being transferred into and out of your business. During inflation the purchasing power of cash is decreased because things cost more money. So it may have cost you $100 to purchase the materials for your product in the past, while now it's costing you $130.
Monitoring cash flow helps ensure you have enough cash on hand to cover your business expenses and debt payments. Keep an eye on your cashflow during inflation to ensure that you are still maintaining your cash balances. The easiest way to monitor cash flow is to evaluate how much cash your business bank account has. Review your cash balances more frequently during times of high inflation.
2. Re-evaluate your Pricing Strategy
During inflation the cost to provide products and services will increase so business owners should consider if they need to adjust their prices to factor in the increased cost.
However, be mindful about increasing prices too much during inflation. Stay privy to the market to make sure that you're selling your products and services at a reasonable price, while also staying competitive in the market.
Remember this easy formula for mapping out pricing strategies:
(What I want = My price x how many times I can deliver). Another way to look at it is, (My price = What I want/how many times I can deliver).
For example, if you want to make $100,000/year selling paintings and you can only make 50 paintings/year, then you must charge $2,000 per painting to reach your goal.
$100,000 = (50 x $2,000) or ($2,000 = $100,000/50).
3. Keep your Eyes on Financing
During inflation the federal reserve usually increases interest rates to combat high prices. By increasing interest rates, it becomes more expensive to borrow money.
This is supposed to cut back on consumer spending (think car notes, home mortgages, etc.) in order to prevent a higher increase in prices. Remember, high demand will result in higher prices which eventually results in higher inflation. Lowering interest rates results in lower demand, which is why the federal government does it.
With interest rates getting higher. It makes more sense to secure fixed-rate financing now so you can secure your interest rate before they increase even further. With a fixed interest rate, your rate will stay the same the throughout the course of the loan and does not fluctuate when the federal government increases interest rates.
With a variable interest rate, your interest rate can change depending on the interest rate that the federal government sets. It's always best to secure fixed rate debt during periods of high inflation.
In conclusion…
Always Remember:
Pay attention to cash flow! Keep an eye on your cashflow during inflation to ensure that you are still maintaining your cash balances.
Re-evaluate your pricing strategy. During inflation, the cost to provide products and services will increase so you must think about adjusting your prices to factor in the increased cost.
Keep your eyes on financing. Build relationships with banks and lenders in case you need cash to weather through downturns in business. During inflation the federal reserve usually increases interest rates to combat high prices. So get in on fixed rate debt and pay off any high interest debt.
Periods of high inflation can make or break small business owners! But, following these 3 steps can be the holy grail for your business!
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