5 Tips to Protect Your Business from the Negative Effects of Inflation

15 Sep, 2016 / Comments: Comments Off on 5 Tips to Protect Your Business from the Negative Effects of Inflation / By

Inflation sets your business up for a potential loss in the future if you are not careful. The rise in the price of goods suddenly makes your dollar a little weaker. Cash is the biggest loser during inflation, which is why it is a good idea for most businesses to steer away from cash assets and focus on diversified investments to hedge against inflation. There are several other ways to properly prepare your business for inflation as well, enabling you to take advantage of the market and those businesses that did not prepare, making your business that much more successful.

 

1.  Limit Vendor Price Increases

As inflation occurs, vendors’ prices typically increase. Without a proper balance with the price you charge your customers, you come out on the losing end. Before this occurs, be prepared to negotiate vendor price increases or determine the length of your vendor contracts. Generally, shorter contracts are more vulnerable to inflation than longer term contracts that can hedge against the inflation risk. Read your vendor contracts carefully to determine if even the long-term contracts contain a clause that allows for a price increase with inflation, as this could harm your business in the long run.

 

2.  Encourage Short-Term Customer Contracts

Customer contracts work the exact opposite of vendor contracts. In this case, the shorter the term of the contract, the better hedged against inflation your business becomes. Long-term contracts typically mean the price is held steady even if your costs increase, which puts your business at risk for a loss. With a short-term contract or a long-term contract with an inflation clause, you can raise prices and protect yourself against rising vendor prices.

 

3.  Save Money Now

It might seem impossible as a business that is trying to make it big in a competitive world, but saving now can prevent you from losing money from borrowing in the future. Hedging against your future needs will help you require the need to borrow less in the future. For example, a fixed rate loan that you take out now might be affordable, but when inflation hits and you start paying the loan with a weaker dollar, you are losing money in the long run. Protecting yourself against this is done simply by using your own money to pay for future business needs rather than borrowed money.

 

4.  Use Small Price Increases

Trying to hedge against inflation with price increases to your customers can seem like a surefire way to lose your clientele, but if you do it gradually, they will not rebel as much. Small, frequent price changes help your business continue to thrive without upsetting the masses. This might seem like an extra expense that you don’t need to deal with on a regular basis, especially if you have printed menus, like a restaurant, but the incremental changes will be more favorably accepted in the long run.

 

5.  Don’t Let Receivables go Unpaid

Businesses are known for waiting until the pressure is on to pay their accounts payable, but that does not mean you need to wait. Be vigilant about collecting your receivables so that you have cash on hand. You can either use the cash received to stock up your savings or to pay down your existing debt so that you protect yourself in an inflationary period.

 

Inflation can be the reason a business fails if you do not prepare. Consider diversifying your portfolio and making your business as cash-friendly as possible in order to warrant against the weakening dollar and inflated prices of your suppliers in the future.

 

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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