3 Effective Methods for Protecting Your Business from Inflation as an SME Owner
Inflation is a silent monster.
It exploits the assets you create through your business and gives you the sudden feeling that the rug has been ruthlessly pulled out from under your feet.
Since inflation occurs in the macroeconomic environment, which is outside your business’s control, there is nothing you can do to immediately improve it; you can only be exposed to its effects.
Inflation touches every part of your business’s numbers: your expenses, costs, sales prices, and the assets and liabilities on your balance sheet. It grows wherever it touches.
This is where SME owners make a major mistake in their battle against inflation.
They cut “low hanging fruit,” the easy costs they can quickly reduce, but they fail to examine inefficiencies in their expense and cost structures—non-sales-generating expenditures—and cut back on these areas.
Moreover, in an inflationary environment, they often think that their customers’ purchasing power has decreased, and with the ill-advised decision of "we protect you from inflation," they refrain from raising their sales prices—a decision no prudent merchant would make.
Another mistake is that instead of investing their assets in inflation-protective investment tools, they invest in areas that generate short-term gains but cause them to miss out on asset creation in the medium to long term. For example, using cash from interest income to buy a new car or purchasing a larger gold necklace for a relative.
The skeletons in your expenses and costs, failing to increase your sales price to at least match inflation, and wasting current assets instead of investing them in future asset creation, are some of the biggest mistakes that will lead to your business's unfortunate demise in the short to medium term.
Here are 3 golden recommendations for protecting your business's assets from eroding due to inflation:
Golden Recommendation 1: Every country faces inflation at certain periods, to some extent. Considering that inflation is a macroeconomic reality, always be in pursuit of efficiency in the components that make up your business’s costs and expenses. Continuously invest in projects aimed at how you can sell more with less, i.e., how to scale your business’s free cash flow.
Golden Recommendation 2: The most cost-effective element in your business is your sales price. The product you produce has a cost, but the sales price you set for it has no cost. Therefore, create an impregnable pricing strategy. The only way to do this is to position yourself in areas where there is no competition or where demand exceeds supply. Apart from discounting or seasonal campaigns, reducing sales prices is equivalent to suicide for a business. Stand firm on your sales price and ensure it is on a constant upward trajectory. Don't waste time and cash in business sectors where you can't make a profit from your sales price.
Golden Recommendation 3: Invest your assets in areas that will protect their value against inflation. Profitable business ideas, investments in stocks and real estate that will appreciate in the future, and business partnerships that will grow your free cash flow. During periods of high inflation, central bank monetary policies come into play, and deposit interest rates rise. You can invest your business’s cash in interest-bearing accounts at least at rates that protect its value against inflation in the short term. However, while your money grows in interest, you must plan carefully what efficient investments you will make with that money in the medium and long term. Interest rates protect the value of your cash against inflation in the short term, but once interest rates drop, you must invest your cash in areas where you know it will create assets for you in the future. Otherwise, your purchasing power will begin to decline day by day.
The mathematics of preparing your business for the future in a strong and wealthy way, whether in an inflationary environment or not, lies in reducing your expenses and increasing your revenues at a higher rate—scaling your business’s free cash flow.
Contact us immediately to create a permanent and effective free cash scaling plan for your business. Don’t waste more time protecting your business and, consequently, your assets from inflation.
To your success and prosperity in business,
Business Coach for CASH
Your Business Coaching Team