Inflation Proof Your Business

Bill Warner Tuesday, April 21, 2009

I am certainly no economist or master of the US financial system, but when I see how much money is being poured into the economy by the Treasury, red flags of inflation flash in my face.

Massive amounts of money are being created

Take a look at the trends. What I think this data says is that by early 2008, the money supply had reached $4 trillion, by the 4th quarter of 2008, it had reached $5 trillion and it is being reported as over $8 trillion. Recent news reports add another trillion in March. By the beginning of 2008, the money supply had doubled since 2002. In one year, it has more than doubled again, with $4 trillion being added in the last few months. I don’t know about you, but that is frightening to me. Yes, we are in a recession, but I am worried that in short order the devalued dollar is going to leap into the forefront as an issue causing price increases and higher interest rates, the key elements of inflation. This recession might snap like a rubber band into a period of rapid inflation.

Evaluate your revenue forecast

The first thing to look at is your revenue forecast. Take a hard look at your competitiveness and the importance of the market need you fulfill. Will your customers still buy from you when they have to cut their budgets? Will the value of your product or service still be there when your customers are under heavy price and cost pressure? Take a hard-nosed look at your sales pipeline and see if it is still the same value it used to be. Be realistic about how you will continue to replenish your pipeline with new prospects. With your analysis of future revenue, proceed to structure your cost and expense structure to a level that is affordable under your newly projected revenue.

Improve your financial position

Smart companies take steps to improve their financial position in order to offset impeding price increases.

First and foremost, take all the actions you can to reduce your cost structure. That is, reduce the cost of goods sold so that your gross margins are strengthened. This may give you the competitive edge you need during a period where prices are rapidly rising.
- Even if you have to invest some money to get a lower cost structure, it may be wise to do it now while prices are lower.
- For product companies, establish long term contracts with price commitments on supplies, parts, components and raw materials. Do not agree to inflation rate adjustments.
- For services companies, establish a healthy balance of employee and contract labor so that you have the flexibility to respond to cut-backs if necessary. With higher unemployment, highly qualified service providers are available at very reasonable rates.
Cut out all expense streams that are truly not important to keeping your business on a growth path and competitive. Some may argue that this is the time to invest in new markets in preparation for a turnaround. I sure would hope that is right, but many are concerned that the turnaround will take years and we may go through a high inflationary period before we bounce back to the usual GDP growth fueled by modest inflation.
Secure a line of credit now with a long term interest rate commitment while interest rates are low.
Borrow money for capital equipment now with long term payment schedules at the current low interest rates.
If you have excess cash, no not hoard it. Place it in inflation proof securities. The value of the dollar will drop during an inflationary period.
Manage cash through strong accounts receivable management. Collect cash with aggressive payment terms and decisive follow up on delinquent accounts. Get your money quickly so you can use it, not your customers.
Again, with higher unemployment, outsourcing services can reduce operating expense. Key aspects of your business that you can move from within the business to outside of it are content development, search marketing, and software development for starters. The one positive factor that will result from this coming economic crash is that businesses will recognize the importance and the value of outsourcing.
Work on establishing even strong customer loyalty to your products and services. Increasing their dependence on your business will help keep them with you when price pressures cause them to consider other alternatives.

There aren’t many inflation proof businesses

Inflation proof businesses are those that consumers and businesses need in order to live from day to day. Examples are businesses in natural resources, energy, metals, raw materials, office supplies and consumer necessities all have an edge during inflationary periods, but their profitability will be under heavy pressure. Most of the rest of the businesses are subject to a choice by the customer as to whether or not they really need what you are selling.

Inflation proofing your business comes down to the usual basic blocking and tackling that is needed in order to manage gross margins, profit and cash flow.