Managing Inflation for Small Businesses

With inflation at a 40-year high and the Feds pulling their rabbit out of the hat to battle inflation to slow the economy (raise the short term interest rate) through manipulation of its monetary policy, it may take a recession to bring prices under control. And all this on heels of a worldwide pandemic, employee issues, soaring fuel prices and supply chain woes.

While it’s painful, it’s not new. Inflation can be considered a “by-product” of money. In ancient Rome, when the emperor couldn’t pay his bills, he decreed that the (solid) silver denarius be made as only a copper coin thinly plated in silver. With the coin now having less value (less silver) Roman merchants demanded more and more denarii in exchange for goods and the coin’s intrinsic value declined. 

When the American Revolution started, the Continental Congress could not afford to buy weapons, outfit soldiers, and pay for a full scale war…so they printed fiat money — paper money made legal tender simply by government decree. Like Bitcoin without high tech.

Just last March, the U.S. Chamber of Commerce surveyed random small-business owners to discover that 85% of respondents said that inflation is a concern, and 1-in-3 respondents rank inflation as their #1 concern. A full 63% have supply chain issues, and 67% have raised prices in response to inflationary pressure.

The numbers were similar across the country and spared no geographical regions or business sectors — it appears we are all in this together.

Because it costs us more to run our business, we need to raise prices to customers in order to offset the increase, and we must hunker down and accept tighter profit margins to remain profitable over time.

Eventually, business should return to normal. Before it does, here are suggestions from the experts at Forbes

  • Resist the urge to wait it out.
  • Review your gross profit margins on a product or service basis.
  • Look for opportunities to save.
  • Have a process to increase prices as needed to maintain adequate profit margins.
  • Resist the urge to be a martyr.

Be advised to view pricing as a “formulaic decision” — based on target profit margins that are sustainable. The endgame is this: price your goods and services to allow the business to continue to grow and scale.” Adapt, don’t fail.

Russia vs. American Small Business

The world economy depends on global energy supplies. We were exposed to supply-chain snags during the Covid pandemic, but with the outbreak of war in Ukraine, sanction and export controls against Russia could make things even worse in terms of inflation.

Our reality check is that today a gallon of gas averages $4.10— a whopping 49% more than the $2.75 in March 2021. If your small business has a fleet of cars or trucks, inflation at the pump can tear into profits.

With commodity prices rising, the cost of services will also rise. Businesses often have no choice but to pass along their increased cost of products and services to their customers. A rising tide raises all boats!


So how can a small business protect itself?

According to the Bureau of Labor, the Consumer Price Index (CPI), which measures changes in the prices paid by consumer for goods and services, had it largest 12-month increase since 1982. If you can, it may be wise to stock up on inventory, invest in property and update equipment before the CPI rises higher.

Now that the Federal Reserve Board has decided to increase the federal funds rate, those who anticipated higher rates and place their cash into interest-bearing CDs, money markets, bonds and savings accounts may benefit. The Fed today signaled multiple incremental increases during the coming year.

If you have access to capital, it may be a good time to purchase inventory and the core materials needed for your business. Examine your technology needs. You may be able to do more with fewer people using state-of-the-art automation that requires less human interaction. 

If eligible, look into a fixed-rate loan from the SBA (Small Business Administration) for working capital and to refinance any existing debt on your business.

Talk to your suppliers about long-term agreements and if you rent business space, consider negotiating a longer-term lease. 

Finally, talk to us as well as your financial advisor. Whatever the nature of your small business, the worldwide pandemic followed by Russia’s invasion of Ukraine are reasons to prepare. 

FOOTNOTE

As the crisis in Ukraine continues, people here in the Tri-State offer help to those who need to leave their homes. Read about the Matthew 25: Ministry program and consider a generous donation for drop off at their location at 11083 Kenwood Road, 45242.

Unemployment’s Roller Coaster Ride

Not since 1949 during the postwar recession have so many workers dropped out of the labor force as they have in 2020/21 during the Covid pandemic. It’s interesting to look at the numbers alongside other dramatic events in the economic life of the US economy.

The highest unemployment in our history was 25% at the height of the Great Depression (1933). As factories retooled and produced goods in 1941 to support the European war, only 10% of workers were idle. In the ensuing years of our participation in World War II, the massive numbers of American men and women working on the war effort reduced unemployment to between 1-2% for three years, and as low (1944) as 1.2%!

Although inching higher, unemployment numbers generally stayed out of the news until the ’70s when they quietly began to rise. In 1974, after OPEC demanded higher oil prices (the minimum wage was $2.00) unemployment jumped to 7.2%.

The ’80s saw the recession-inspired unemployment rate of 10.8% decline after President Ronald Reagan signed the Garn-St Germain Depository Institutions Act of 1982 (a mouthful for the Act of Congress that deregulated savings and loan associations and allowed banks to offer adjustable-rate mortgage loans). This decade will be remembered for October 1987’s Black Monday when the Dow dropped 508 points, and millions lost their jobs.

During the ’90s with Desert Storm, welfare reform, and NAFTA the U.S. created 23,672,000 jobs, and hourly wages increased 10%. Unemployment rates sandwiched between a low of 4% and high of 7.4% and the economy grew — but so did interest rates. 

The year 2000 saw the NASDAQ reach record highs, but then the World Trade Center was attacked in 2001. The War on Terror raised unemployment and the 2008 minimum wage was raised to $6.55, and a year later to $7.25. The 2010 Republican tax cuts did little to curb unemployment until Trump won the Presidency in 2016 and the economy rebounded.

in 2019 COVID reared its ugly head worldwide. In the US, employers were forced to let workers go as government-enforced emergency rules dictated which businesses could remain open and which must close — rules were imposed at both Federal and State levels to reduce transmission of the worldwide pandemic. Even though the unemployment rate in 2021 hovers around 6%, 2020 will be remembered by most as “the year that wasn’t.”

We Americans are a resilient people. The Congressional Budget Office projects an economic expansion to return to pre-2020 levels and perhaps surpass expectations.
See the CBO Overlook 2021 to 2031.
The Ohio Chamber of Commerce is optimistic, and projects that housing will lead the way.

We are watching the unemployment numbers and other economic news, especially for Cincinnati and surrounds and are well prepared to serve those small businesses bravely leading the charge to prosperity. Call us at (513) 322-1036 or email info@dlmneymatters.com