On January 12, the New York Times reported inflation is rising at its highest rate since 1982—something everyone has experienced as prices for essentials such as gas and food soar while supply chains remain unable to keep up with production due to shortages in both materials and workers. And in the midst of the latest COVID surge, experts are saying inflation won’t be returning to pre-pandemic levels in the near future.
While the Federal Reserve Bank suggests this period of inflation is merely transitional, businesses are struggling to maintain both work force and product. For both our Firm and our clients, we want to make sure to have the important “what if” conversations today.
When I speak with business leaders and my industry peers, we hear the same hard questions, time and again. How can we maintain the work force we need with the recruiting challenges of today? How can we protect our bottom line without only pushing price increases to our customers? Below are a few actions we think it’s important to make today before these challenges may impact your business in an irreversible way.
Examine your budget
No matter your industry, if you’re a business owner, you need to examine your budget with inflation in mind. To get an idea of the cost of increase from your suppliers, look at your historical gross and net profit margins. Compare your profit margins from this year to last year. How has that percentage changed? What were your original projections for the year, and where did those costs shift?
Additionally, you may be able to lock in on a longer-term supply contract or agree upon fixed increases with your suppliers. Changes like these can help you get a better handle on your cash requirements by giving you more control on your significant fixed costs.
Pay special attention to the largest expense areas in your organization and pick apart how they may be impacted by the current trends. For instance, if you are a service Firm, payroll increases are likely a necessity this year. If you are a retailer, consider the implications of freight and inventory delays to your revenue and profit. There are also new costs every organization should make sure to build in for remote technology needs and cybersecurity insurance.
For the third year in a row, we are advising our clients to really examine what a “worst-case” scenario might mean for their organization. The good news? We’ve all gotten good at adapting quickly.
Provide higher raises and better benefits
As prices continue to increase, the best way to attract—and keep—talented employees is to raise their wages. Workers should expect a 5-7% salary bump in order to maintain cost of living, but they’ll likely be looking for more. Consider your employee’s standing with the company. Have they taken on more responsibility? Has their role changed as the needs of the company have shifted? Competitive raises could help prevent top talent from leaving and may be an expectation for which you should be prepared.
With 33 million workers leaving their jobs last year in what’s been called “The Great Resignation,” there’s also been negotiation for sign-on or performance-based bonuses, better health insurance, and more flexibility, such as working from home.
Consider raising your prices
Although every industry is affected by inflation, how much your industry is impacted depends on the goods or services you provide. When adjusting your prices, it’s important to examine just how much your business has been affected by inflation—and where those costs have pooled.
If your industry is relatively low cost, the simplest way to get started is to take the consumer price index (CPI) rate increase and raise your prices by the same percentage increase. But further analysis might show that your reliance on something like freight—where inflation is especially high—means you need to raise your prices even further. Additionally, it may make more sense to target price increases where your margins are most affected—and where customers are most likely to be amenable.
Just be careful! Customers are feeling the squeeze, too—and may be more willing to look for a lower-priced option if they feel the price of your products or services have increased too much.
Keep your priorities in mind
There are growing fears of wage-price spiraling where workers demand higher pay to offset higher costs — and, in return, companies have to start charging higher prices in order to pay more. If this cycle goes on for too long, it can create a spiral that might leave Americans worse off.
In times like these, I always fall back on our company values. What are the non-negotiables for your company? What are the unique attributes that make your business successful? History shows us that by focusing on those things, good results usually follow.