Dealing with Inflation

All pointers indicate that we are heading for a prolonged period of inflation. All reports point at supply side issues and an increase in demand for goods that is triggering such an inflation. Notwithstanding the fact that supply side disruptions are likely to be the main cause for this inflation, it is likely that the ECB will be pushed to tighten its monetary policy, to defend the Euro and not have additional inflationary pressures due to the loss in value of the Euro currency. On the other hand the ECB needs to be careful that by tightening monetary policy it does not push European economies into stagflation – a period of stagnant economic growth and and persistent inflation.

How should businesses prepare themselves for a period of sustained inflation? Here are some insights

  • First and foremost, understand your value chain and your business model. Make sure to fully understand the exposure your business has to supply chain shocks. Make sure to properly assess the risk of disruption and the impact of such risk on your business. If possible, develop alternative sources of supply and/or keep sufficient inventory. The days of keeping lean, just-in-time inventories are gone!!!!!! Obviously to keep more inventories you need to have the financing in place to do so.
  • Is your capital structure strong enough to sustain your business in this period? So it is high time to review your capital structure: your mix of equity, reserves, bank loans, overdrafts and supplier credit. In a nutshell you need to be a hawk on your cashflow and your cashflow forecasts. Make sure that you have enough liquidity to pay what needs to be paid in time with some good headroom for unexpected shocks. Also be sure that should your debt exposure be hit by any rise in interest rates, that your business is able to handle this increase in debt servicing. You very likely need to revisit your financial budgets and forecasts with a new mindset, making sure that you have enough liquidity cushioning for the mentioned shocks, be them supply shocks, decreased demand or increase in interest rates.
  • Get your head out of the engine room. Now more than ever you need to pay extra attention to global developments and how these are going to effect supply chains, tourism, demand for your products, labour costs and much more. All of these factors can no longer be taken for granted. When things get turbulent you cannot expect that everyone will act rationally.
  • You may not be an economist, but you need to pay attention to economic analysis. If you you cannot master the skill of understanding leading economic analysis dished out by the EU commission, Central Banks and IMF, make sure to get in contact with someone that can help explain what all this means. All the economic analysis provided by these institutions contains value insights and information than can help you adapt and lay out new plans and adapt business models so that you are not surprised by developments in the general economy.
  • As things get turbulent, this will very likely have a hard impact on the labour market. So it is definitely the time to make sure you do not lose your best elements whilst keeping morale high. This is where leadership will prove to be useful. Losing a key employee means months of lost productivity and expenditure of additional efforts to find and train a replacement. Consequently, it’s especially important to be in constant communication with employees and at least be aware of their plans for switching jobs. Be more flexible in accommodating their personal needs, such as letting them work from home, which may boost employee productivity.
  • Be strategic. Do not fall to the common pitfall that you apply a universal axe and pursue an across-the-board cut of expenditures. An obvious outcome of such actions is low morale and likely loss of your best employees. It may also be tempting to start cutting forward-looking expenditures like employee training and advertising. I strongly advise you to become strategic in your actions. Take your decisions on a well inform data basis or KPIs like :-
    • The Potential Return on investment based on the current scenarios
    • Your Cash Operating Cycle (the time it takes between investing cash in inventory to recovering cash from the customer)
    • Risks and uncertainties, from supply chain shocks to customers’ ability to pay
    • The potential for growth. Even in the most turbulent circumstances there are new growth opportunities.

Many times I meet business leaders who feel at a loss of how to deal and prepare themselves in the current scenario of a likely sustained period of inflation. Some are like on the spot joggers, pushing themselves to getting sick with worry whilst others are just hoping that this will magically go away. What is important is that business leaders keep a rational mind and develop an in-depth understanding of the issues at hand and create a game plan to address these rapidly evolving challenges.

One thought on “Dealing with Inflation

  1. Pingback: The Fall of Discretionary Spending – Silvan's Business Insights – A Business Blog for SMEs & Family Businesses

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