Inflation is Here. Plan Ahead and Protect Your Business With These Three Strategies

Skyrocketing inflation and resource scarcity prompted by the pandemic are top of mind for many business owners. The spike in material costs and the shortage of goods and labor now coupled with the expected rise in interest rates can have serious repercussions across businesses and industries nationwide.

Fortunately, with foresight and flexibility, business owners can minimize the sting of surging  prices and supply chain bottlenecks. Taking action and remaining nimble amid uncertainty can help you avoid feeling powerless—and poise your business for success. 

These three strategies can help you take control of your business and gain confidence about what lies ahead. 

Control the cost of your materials
One of the first effects of an inflationary environment is an increase in material costs. The rising prices of lumber, steel, and other vital materials can put a significant dent in your bottom line when not matched by rising revenue. To maximize gross margins, business owners should look for every opportunity to match variables in their supply chain costs to their revenues. 

One critical step is adjusting your customer agreements by locking down fixed prices on longer-term purchase orders. Another strategy you can use is stockpiling inventory. By buying more materials at current prices, you can avoid future, inflated prices.

Drawing on a business line of credit like First American Bank’s Asset-Based Loan* solution is also a smart way to survive a period of increased costs by paying for a large purchase order and locking in your costs. This flexible line of credit automatically adjusts to the rise and fall of  your inventory. As your assets rise, your receivables and inventory will as well, meaning you can borrow more and ensure supply at known costs.

Adjust your prices
For the  companies who pay their sales employees a commission based on company sales prices, it is important to adjust these commissions as your sales prices rise. Neglect to do so could mean overpaying employees and hurting the profitability of your business. 

Review your customer contracts and be sure to impose any escalator provisions immediately. Adjusting your pricing upfront on fixed price contracts will also help you avoid the burn of lower gross margins at year’s end. Though customers won’t enjoy higher prices, they will not be surprised given the widespread inflation.

Monitor your overhead 
If your business uses pricing models, you may run the risk of assuming overhead expenses that don’t reflect rising costs. Labor, rent, transportation, interest rates, and even the expense of carrying more inventory—if not correctly accounted for within your cost formulas, could lead you to severely underestimate these expenses. To protect against the rising cost of overhead, carefully review your pricing models to ensure continuing accuracy.

With so much beyond business owners’ control, having a reliable and accessible financial partner is more critical than ever. The dedicated team of commercial lenders and advisors at First American Bank can talk you through important financial considerations and offer tools to keep your business flexible amid ongoing change.

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