Dale Fontenot: Small Businesses Need to Prepare for Inflation

Monday, April 25, 2011

Small Businesses Need to Prepare for Inflation

Many of us have been warning about inflation, and it apparently is beginning to rear its ugly head.

Large businesses are better able to buffer themselves from the impact of inflation. We are already seeing automobile manufacturers and airlines raise prices to offset higher costs caused by inflation in the areas of energy and raw materials.

Small businesses are generally in a much weaker position to adjust prices when inflation kicks in. Many small businesses are already weakened by the prolonged recession and are hesitant to raise prices right now.

How can small businesses prepare for the onslaught of inflation that seems almost inevitable?

Now that inflation has begun to heat up, it is time to become aggressive with frequent small price increases. This is generally a much better strategy than waiting and trying to catch up at some point with one big jump. For some businesses that post prices, such as restaurants with printed menus, this will create a challenge. But it is worth the effort, as customers are more willing to accept smaller price increases.

Cash may be a questionable investment during inflation, as its value decreases due to its diminishing buying power as prices go up. However, cash does become a critical asset for small businesses facing inflationary pressures. Cash reserves can serve as a buffer, as costs often increase faster than the entrepreneur can raise prices. “Cash is King,” even during inflation, so it is important to build cash reserves to buy time until you are able to pass along higher prices to your customers.

If your business extends credit to customers, stay vigilant in collecting receivables. Don’t let customers manage their cash-flow challenges at your expense.

Debt can create risk to small businesses during inflation. The Federal Reserve will begin to use interest rate hikes to battle inflation. Pay down variable-interest loans as soon as possible, as interest rates are likely to increase over the long term and drive up the cost of debt. Be prepared for much higher rates when your other loans need to be renewed.

One way to stay ahead of inflation is to stock up on inventory before prices from your suppliers go up. But be careful not to jeopardize your cash reserves when buying ahead with inventory.

Eventually, inflation will begin to create wage and salary pressures. Smaller businesses can see profits getting pinched as payrolls go up. When this happens, focus on the efficiency and productivity of your work force.

Inflation is a completely new experience to many current business owners, as we have not had high rates of inflation in almost 30 years. Watch your margins carefully. Worry about growing profits, not just your sales.

Be prepared for more difficult times ahead. Expect a continued fragile economy, but with the added pressures of inflation.