I have been concerned about inflation for some time. While the day-to-day signs have not supported my view, public policy decisions that include massive deficits have kept the nagging worry about inflation with me even while others have been talking about inflation being "permanently" under control.
But the talk over the past few weeks from the Fed is that they are going to use inflationary policy as an intentional "cure" for our economic woes has affirmed my worst fears.
Clearly, those in power in Washington do not believe that market forces will be what re-energizes our economy. What they are telling entrepreneurs is this: "You are irrelevant in economic recovery." Given that it has been entrepreneurs who have led us out of almost every past recession, this is an alarming shift in policy.
So what are the entrepreneurs to do? What will this all mean for your businesses over the coming years? Get ready for an even rockier road than you have suffered through up to this point in the recession. That's right -- things are about to get worse. Much worse.
The problem for smaller businesses during inflationary times is that they are less able to adjust prices as quickly to adjust to inflationary pressures. There is never a smooth and orderly increase in prices for every business in the economy and small businesses often suffer the most.
If you have big suppliers and/or customers they can tie your hands. Your costs go up, but you are unable to pass along these costs with higher prices. You already fragile profit margins will quickly begin to vanish.
So what can a small business do in terms of pricing strategies to try and weather this impending inflationary storm?
The recession has made entrepreneurs leery of doing anything but cut prices to keep their businesses afloat during the recession. While that may still seem like the best course over the short-run, pay very close attention to pricing from your suppliers, increasing interest rates, and pricing moves from the big boys in your industry. These are the metrics that should be on your inflationary dashboard.
When inflation heats up even a little, be aggressive with frequent small price increases rather than waiting and trying to catch up at some point with one big jump. Don't let yourself get behind, as small businesses can almost never play catch-up with their prices.
This can be tough to implement for some businesses, particularly if you publicly list your prices. For example, it can get very costly to print up new menus each month for a restaurant owner who wants to follow this strategy.
But customers are less likely to pay attention to price increases if they are small, so it is essential to find creative ways to communicate your pricing to allow for you to implement this strategy during inflationary times. For a restaurant it may require using menu inserts that can inexpensively be replaced. This was actually very commonly used in restaurants during the 1970s and 1980s when we had high inflation.
Continue the prudent management of expenses that helped you survive the recession:
- Continue to keep overhead low. It has paid off during the recession and will serve you well during inflation.
- Continue to build cash reserves to buffer short term price increases that precede your ability to get higher prices from your customers. I know this sounds contrary to the investment advice about holding cash during inflation. Don't think of this cash as investment -- it is your levy to hold back the rising tide of inflation.
- Watch your margins carefully. Worry about growing profits, not sales.
- Don't lock into long-term contracts large customers that have narrow margins. These contacts will quickly become money losers when inflation spikes.
- Pay down variable interest loans ASAP, especially now that interest rates are temporarily relatively low. As soon as inflation heats up, interest rates will continue to rise. And given the stubbornness that the Fed is now showing with interest rates, we may soon see huge spikes in rates over just a few quarters as inflation takes hold.
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