How To Succeed Despite the Noise
June 8, 2021Four Steps to Creating a Small Business Budget
June 24, 2021Inflation is Coming… What Does It Mean for Small Business?
There is a dark cloud floating around the business sphere right now. It has been discussed in every major board room. I’ve even had a few business owners reach out to me with their concerns. It is no longer lurking around the corner, keeping many business owners on edge. But what can you do to mitigate the damage done to you and your business? Join me, as I take an in-depth look at rising inflation and what it means for your business.
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TIME INDEX:
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- 00:45 – Is Inflation Approaching?
- 01:46 – What is Inflation
- 03:43 – Why Measure Inflation
- 05:19 – Why Does it Matter
- 06:41 – Indicators of Inflation
- 11:58 – Responses to Inflation
- 14:54 – What About Our Businesses
- 17:19 – Example
- 20:04 – Wrap Up
What Is Inflation?
Before I can really dive into today’s topic, I need you to understand what inflation really is. Simply put, it is a measurement of the way prices rise over time. That’s really all it is. However, we find this term in the Consumer Price Index (CPI). The CPI tracks and measures the inflationary rate on a year-by-year or even quarterly basis. The Federal Reserve tries to control the inflationary rate through monetary policy. Ideally, they try to keep it at about 2% per year. But how do they do it? By monitoring the economic cycle of expansion, peak, contraction, and trough.
You see, every economy in the world goes through similar phases. It’s through this cycle that the Federal Reserve tries to measure their particular target. They do this because some economists view inflation as being good for businesses and consumers. You see, many economists believe inflation comes when the supply of money is greater than the demand for money. As such, inflation is viewed as a positive when it helps boost consumer demand and consumption, driving economic growth. In fact, famed economist, John Maynard Keynes said, “Some inflation helps prevent the paradox of thrift.”
A Few Basic Indicators
When people begin talking about inflation, they’re generally referring to significant inflationary trends. If you’re old enough to remember the 80s, then you know what I’m talking about. So, to know if such inflationary trends are coming, we have a few indicators to lean on. First, there’s something known as capacity constraints. Basically, this is when we have too much money chasing too few resources. We are currently seeing this with several commodities. For example, my brother-in-law owns a pool business and he can’t get chlorine. The demand is too great and it’s causing shortages of chlorine.
Another indicator is seeing the money supply increase. In other words, the banks are lending more money. Just before the 2009 financial crisis, people were buying land and building spec houses. It was the hottest trend in the country because the banks were so loose with their lending. People who should have never qualified for certain mortgage loans were getting them with ease. Yet another indicator is increased deficits. This is when we spend more than we’re making. Look at the federal government. We’re operating in a deficit every year. Especially last year with the COVID-19 relief bills.
Other indicators include a change in consumption habits and government spending. I can see the change in consumption here, in East Tennessee, with the sudden increase in boat purchases. I even have friends who purchased boats in the last three years, now selling them for more than what they originally paid. That’s because of the change in consumption habits. As for the government? Just look at the stimulus packages. Overspending by the government is a big indicator that we are approaching an inflationary increase.
How Do Business Owners Respond?
As you can see, many of the indicators of coming inflation are happening right now. So, how can business owners respond? Let’s, first, take a look at investments. A great option for times like these is U.S. Treasury Inflation Protection Securities (TIPS) or Series I Savings Bonds. As you may have guessed, these are types of bonds. If you remember the see-saw effect that bonds have, as inflation causes interest rates to rise, the bond price goes down. Another option is to use non-cash flow generating or alternative assets.
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These types of assets include gold, bitcoins, art, antiques, and other types of commodities. These are great during times of inflationary trends because they often increase in value. Of course, this isn’t always the case and past performance is not indicative of future results. Any assertion to the contrary is a federal offense. However, in general terms, prices for these types of commodities change year by year. Typically, financial advisors caution against these assets because they don’t generate any cash flow. But that could potentially work in your favor during times of inflationary increase. But friends, please, speak with a competent financial advisor or conduct your own due diligence before making any investment decisions.
Another option is to seek assets with cash flows that can grow as inflation increases. One example is real estate. I happen to love real estate because it is a real property that can be used to create leverage, allowing you to buy a lot of assets for a little bit of money. Likewise, dividend-paying stocks are often a good option during inflationary periods. Again, none of this is investment advice. You need to have a conversation with your advisor to determine what is best for your individual situation.
What About Your Business?
Oftentimes, the largest asset on a business owner’s balance sheet is the business itself. So, what can you do to protect your business during times of inflation? Watch your pricing very closely. During these times, the cost of goods and supplies is going to increase. As your costs rise, you will need to also increase prices to reflect the increased costs that you’ve incurred.
I recently sat down with a client and asked them if they had considered changing their fees in the last 9 months. They hadn’t given it any thought. But when we ran through her numbers, we discovered that she was paying more for the supplies she needed to operate her business. As a result, she was doing the same amount of work and making less money. Closely monitoring your pricing will allow you to be flexible during economic shifts, ensuring that your profitability remains consistent even during inflationary periods.
I remember, vividly, during the 2008 recession, people stockpiling cash. With that in mind, perhaps now is the time to start stockpiling, not just cash, but inventory as well. If you understand the cycle, then you know that the time to buy is during the contraction or trough phases of the cycle. Now, this is when most people don’t want to buy, but I’m reminded of a statement by Warren Buffett. He said, “Be fearful when others are greedy. Be greedy when others are fearful.” If inflation is coming, you can position yourself and your business to be ready for it. If you don’t know how to do that, reach out to us.
Wrapping Up…
Folks, there are several indicators pointing toward increased inflationary rates. But now’s the time to speak with your financial advisors. Make a plan for how you’re going to position your business and yourself to not only survive but thrive. Friends, I know life is hard, but it’s still good. Inflation can be frustrating. I get it. But knowing how to respond to inflationary trends can make weathering the economic storm, at least, financially simple.
If you’re concerned about how you and your business will withstand increased inflationary rates, reach out to us. The team at Financially Simple works with business owners every day, helping them to be prepared for all of life’s little storms.