Control Costs and Communicate Effectively to Weather Economic Swings

Facing the twin economic impacts of high inflation and a potential recession is rare, but here we are. The continuing challenges of supply chain shortages and a tight labor market, as well as soaring energy prices, have fueled inflation to an annualized level over 8%, after several years of relatively tame inflation.

Consumers are feeling it in the grocery store and at the gas pump, and business owners are feeling it in the prices they pay for raw materials, component parts, wholesale goods and labor. A recent survey found that 85% of small business owners were concerned about inflation, and one-third of respondents listed it as their top business concern.

Inflation is nothing new, of course, and economists believe a constant level of about 2% inflation is healthy for the economy. But today’s level of 8.25% inflation is the highest in 40 years, and while it has not yet spurred a major contraction in consumer spending, it has caused consumers to shift their spending from goods to services. This has, in turn, impacted retail stocks and intensified concern about a looming recession.

All this makes it a tough time to be a business owner. Just as we were pulling out of the COVID-19 pandemic and people were pouring back into shopping malls and restaurants, the economic roller coaster ride began.

Communication is Key

For owners of small and medium-sized businesses, the keys to not being a victim of economic swings are:

• Understanding where your costs are, which costs are rising quickly, and which costs you can control.
• Strong communication with customers, vendors and suppliers. The business owner who can talk proactively with customers about the rising costs for goods and payroll, and the need to raise prices at least temporarily or renegotiate contracts, will come out of this inflationary period stronger.

Inventory-driven industries such as manufacturing and distribution are seeing challenges right now in the cost of inventory. If you are contractually obligated by customer agreements to hold 120 to 180 days’ worth of inventory, you are currently buying large orders of goods at inflationary prices. Having good communication with your customers about temporarily reducing inventory levels to 90 or 120 days can help hold off purchases for a few months pending possible price reductions. A temporary renegotiation of contractual inventory obligations may be worthwhile with some customers.

For businesses that have costs concentrated in payroll, the key to riding out today’s inflation may be trying to right-size staffing levels and hold wages and salaries as steady as possible. That’s tough in a tight labor market, but it may be the key to pulling through this inflation bubble in good shape.

Honesty the Best Policy

Above all, be honest with all stakeholders – customers, vendors, suppliers and most importantly, employees. They all know there are businesses out there that are increasing prices opportunistically, increases that are not supported by increases in their costs. That’s called price gouging.

Customers will be more willing to accept a price increase if you negotiate it as a temporary measure and stick with that agreement when and if your costs do come down.

No one knows yet when things will return to “normal.” As the COVID-19 pandemic wound down we talked about a “new normal.” Perhaps we need to consider what the new economic normal will be going forward.

Most importantly, remember that business is about long-term relationships. You want your customers to still be there when the economic tide turns. You’ve worked hard to keep their business, and it’s important to convey to them that you can work through this together.