I have been fortunate enough to be in business for 20 years now. During that time, I have not experienced a period of inflation like we are seeing today. If I could go back to the 70s and listen to my parents tell me about what life was like with 15-20% mortgage rates, crazy gas lines, bell bottom pants, and bad polyester… I might get a more realistic sense of what high inflation was even like. But today’s inflation is a new ballgame for most of us. While this can feel a bit scary, I still believe business success is all about having sound principles and dialed-in processes. After all, just like polyester, good systems and processes will never go out of style!
As we consider the current inflation and what may lie ahead, I always want to go back to my basics. I can’t guarantee that these concepts will inflation-“proof” your business, but I can share the habits I think are super crucial when it comes to making sure your house is in order.
The first rule to inflation-proof your business: Always understand your primary goal.
Stephen Covey, author of 7 Habits of Highly Effective People, would say, “Start with the end in mind.” Cheshire Cat would say it doesn’t matter which way you go if you don’t care or know where you want to go. Having a goal and a plan is super crucial. Working backward from the end is a step that I think most business owners don’t do, but it can have a clear impact on your business alignment. Having a target, goal, or battle plan is where I start. Be super clear of where you want to be in 7-10 years, then work back to 3 years from now, and then a year from now. Lastly, ask yourself, “What do I need to do this quarter to allow me to hit my one-year goal?”
To give a small example, let’s say my 1-year goal may be to maintain my current profitability. If I have always made $250,000, I will need to ask myself, “What will I need to do this quarter to maintain that net profit of $250K?” Because I’ve started with the goal in mind and worked backward, I can now determine concrete steps and milestones to help me reach this goal.
Your second step to “inflation-proof” your business: take a long, hard look at all of your variable costs.
This means the direct costs to sell your product or services. Right now, inflation is impacting everything: gasoline, food costs, supplies, and even labor. Take the time to take a hard look at each and every item that is a direct cost to sell your product. Honestly, the increase in each cost will probably shock you, but you’ve no doubt felt the impact already. I believe your customers are feeling it as well and will be more receptive to a price increase or a tweak to your current offering if you need to adjust. Now is a good time to review your suppliers or have a serious conversation about what you can do to continue working towards your goals. You may find an alternative to a product. You may have to change your latest offer. You may be able to alter a recipe slightly. Tightening your menu, reviewing options, and talking to your vendors always help. They want to maintain your business right now and could have some suggestions on ways to help you get more for less, or at least cut out the things you aren’t taking full advantage of.
Your third step to “inflation-proof” your business: review all your debt obligations and agreements.
There’s no hiding it- interest rates are rising. If you have any variable rate debt or revolving debt, now would be the time to set up a fixed-term rate debt and have a plan to eliminate or at least avoid the risk of inflationary rates. Personally, I find it easy to let interest leakage happen through poor habits. Credit cards, lines of credit, and even some real estate debt all have the potential to creep up in a hurry, so do yourself a favor and find ways to take advantage of fixed-rate debt. By fixing the rate, you will actually get more bang for your buck if inflation does happy because the dollar you pay towards fixed rate debt is actually worth more if inflation does happen.
Your fourth step to “inflation-proof” your business: ensure that your emergency funds and operating capital reserves are appropriately funded.
Unfortunately, not all of your customers will be able to handle the rising costs like you can. By having your emergency funds fully funded, you can be assured that if your business does take a downturn, or you have an opportunity to grow or invest in something important, you have the capital you need to take advantage of whatever may come your way.
When it comes to emergency funds, there are a couple of rules of thumb that are generally accepted. The first rule of thumb is to set aside 10% of your annual revenue. This can be a large number for a lot of businesses, depending on the product or service they sell. For a product-based business, this amount may even be low. An alternative measure is to have three months of payroll expenses saved up in your reserves. This is a conservative number, especially for a service-based business that is likely super labor dependent. Finally, the third rule of thumb is to have 3-6 months of all expenses in reserve. Personally, I don’t think any of these are better than another – they are all good goals to shoot for. Pick one, create a plan to build up your cash reserves, and then focus on executing that plan.
The fifth step to “inflation-proof” your business: Don’t be afraid to raise your prices if you need to.
Be sure you are getting paid appropriately for the product or services you are selling, especially when it is costing you more to create/offer it. I often see business owners undervaluing the work they do or the products they are selling. Remember, you are in business to make a profit. If you start with that mindset and remember that underpricing will make you unable to invest in future products or growth, you will know when you need to change things up. Hire appropriately, effectively market your services, and most importantly, take home the money you deserve. Charge appropriately, or you’ll become your business’ own worst enemy. Adjust as necessary and don’t be afraid!
Now that I’ve had my firm for 20 years, I love having these conversations with other business owners. If you don’t know where to start, have questions about what to prioritize, or just need a pep talk to be ready to raise your prices, please reach out. Taking precautions and making small changes one step at a time will prepare you and your business for success, regardless of what the next year holds!