Inflation Rises to 5% in May
There are a lot of worries and predictions coming up about inflation.
And what we have noticed is that there’s a lot of advice out there on how to handle inflation personally.
But, we haven’t seen many people talk about how to handle inflation as a business owner.
Of course, inflation can absolutely destroy a business, reduce cash flow, and stagnant growth. Which is the main reason you see investors starting to worry and pull back in the stock market.
So in this post, we want to dive straight into how businesses can handle inflation in 2021, 2022, and pretty much at any time. Keep reading!
Let’s not waste any time and jump straight into how to handle inflation as a business owner.
5 Ways on How to Handle Inflation as a Business Owner
Tip #1: Beat the inflation rate
So let’s do some math together. Let’s look at a pretty bad scenario where there is an annual 12% inflation rate.
Now we know, that’s pretty aggressive, but let’s go there for a second.
So we have an annual inflation rate of 12%, which month over month is a 1% inflation rate. So, let’s say your business made $10,000 in August.
Well because of the 1% inflation rate, that $10,000 is actually now worth $9,900.
This means your purchasing power decreased by $100. So, if you want to maintain your purchasing power then you need to at least $10,102 to beat the inflation rate.
Simply beating the inflation rate will help your business handle inflation a lot easier.
So as a business owner, especially right now in 2021, you need to be prudent with keeping up with inflation.
And running your own numbers to see how your business and employees may be losing purchasing power is a good way to start.
There is a website called usinflationcalculator.com that we use to keep track of what is happening
So of course, your next question is probably…
“If I make more money then yes I can beat the inflation rate, but how do I do that?”
Well, one of the obvious answers is to increase prices as inflation goes up.
But you want to do this strategically because you don’t want to confuse your customers and employees with prices rising every month.
Also, you can simply just try to push a little bit harder and get more organic sales so you are beating the inflation rate.
Optional Tip: Consider business loans
In 2020, corporations took out a record amount of loans to help their companies maintain with the help of the federal government facilities.
And it was eye-opening to us because in our opinion it showed how important corporations are to the fed and they definitely don’t want to see them go out of business.
But, as we know, as a small business owner debt can be scary because the future isn’t always certain for us like it may be for corporations.
However, when you look at debt we know that as inflation goes up, debt becomes cheaper.
So if you have a business that is already established. we repeat it is established, and you have positive cash flows that you can predict with relatively strong confidence.
Then you may want to consider taking a business loan to make more business investment because you likely can pay it off as inflation rises.
Tip #2. Master cash flow
So one great thing about business is that you likely have some recurring expenses which force you NOT to hold on to cash and continue to be productive.
But now is the time to get even more disciplined when it comes to managing your cash flow.
And one of the BEST things you can do is make sure your cash flow is as predictable as possible.
This means you can reasonably estimate what you are going to make next month as revenue, and what you are going to spend as far as expenses go.
And with those two things, you are able to get to an estimated profit.
Based on the level of profits, you can decide or put this away, as an emergency fund for your business. Or, are you going to reinvest these profits back into the business?
Either way, when you are able to anticipate your cash flow then you can start planning now on what to do with the cash.
Tip #3. Lock in prices now
This one goes along with our second point of mastering cash flow.
So what you want to do is lock in prices now for goods and services that you know you will need in the long term.
Now, this tip will likely come easier for experienced business owners because they know what they spend money on every year.
But for new businesses, you need to think really hard about what it is that your business needs.
And if you discover that it’s a long-term need after testing of course, then try to lock in a long-term rate.
Most vendors and online SaaS companies prefer you to do an annual contract because that also gives them predictable cash flow.
So do some digging, thinking, and research to figure out what prices you need to lock-in.
Tip #4: Invest in business assets
So remember when inflation goes up, so does the price of goods. So when that goes up, you will have to pay a lot more money for it.
So if there is a business asset that you need right now, something that you know you’ll need for sure, let’s say you run a manufacturing plant and you need new equipment.
Well, if you anticipate the cost of that equipment going up due to inflation and you need it for your business, making the investment makes sense.
Because in the worst-case scenario, if your business does fail then at least you have an asset that you can potentially sell at a higher price.
Plus depreciation benefits, but we’ll save that for another time.
The point is to invest in business assets that could end up appreciating in value as inflation rises.
You could also invest in a rental property, a piece of real estate in a great area that your business can operate in and own. And, as inflation increases the price of your property can go up as well.
Or maybe you invest in a business asset like a website, or NFT, or social media presence. All of which you could sell later on if you needed to.
Tip #5: Look at accepting other forms of currency
Cryptocurrencies like bitcoin are becoming more popular and many people believe that they will hold their value if the inflation of cash goes out of control.
So if you’re in the inflation camp then maybe you want to get a jump and start researching how to accept other forms of currency.
Now we’re not saying that you actually need to set this up now, although some people are like this website here from Cardone have already started accepting bitcoin.
Of course, you heard of companies like Tesla also accepting bitcoin. Although they recently pulled that back.
The point is, they’ve started researching it, and you can do the same.
Companies like PayPal are also starting to accept cryptocurrency. Plus, we’re sure other big payment processors will join the party as well.
So there goes the top 5 ways on how to handle inflation as a business owner.
And if you want more advice for your specific financial situation, then be sure to check out our financial advisory services here.
Or, schedule a meeting with us today!