Amy Powell is the founder of AimWell Financial.Inflation
One of the most common inflation-related mistakes I see from business owners isn’t failing to recognize inflation. It’s waiting too long to respond to it.
Costs begin creeping higher, margins get a little tighter and profitability comes under pressure. Rather than making small adjustments along the way, many owners absorb those increases for as long as possible. Eventually, however, their hand is forced. What could have been a series of modest pricing adjustments becomes a much larger increase that’s harder for customers to accept and more disruptive to the business.
Inflation is a standard assumption in financial planning, but business owners should approach it the same way in their business planning. The most effective inflation strategies are often the ones put in place before inflation becomes a problem.
Know What Is Temporary And What Is Not
One of the biggest challenges a business owner can face during inflationary periods is determining which cost increases are temporary and which represent a more lasting change. Some disruptions eventually work themselves out. Others permanently change the economics of providing a product or service.
When thinking about what cost increases might be temporary versus what might be more sustained, I would compare the increases to historical expectations. If a particular input has historically increased by roughly 3% annually and current increases remain within a similar range, that may simply be a cost that should be built into future projections.
Other increases are driven by events such as a drought, fuel spikes or shipping disruptions that may create temporary pressure on part of the budget. The key is to understand what caused the increase in the first place. At the end of the day, costs are driven by supply and demand.
Many business owners assume rising costs will eventually reverse. Sometimes they do, but often they don’t. Businesses that correctly identify the source of a cost increase are better positioned to respond appropriately.
Do Not Let Inflation Sneak Up On Your Margins
One of the patterns I see repeatedly among small business owners is a reluctance to make small pricing adjustments over time. In most industries, customers are accustomed to modest price increases over time, and I’ve always been a big advocate of building in regular price adjustments.
The challenge is that many business owners wait. They worry about upsetting customers or losing business. As a result, they absorb rising costs until the impact of inflation sneaks up on them. Eventually, however, what could have been a series of modest adjustments becomes a much larger increase that is harder for customers to accept and more disruptive to the business.
Deciding whether to absorb rising costs or pass them on to customers can be tricky. The temptation is often to protect customer relationships by absorbing the increase. What many business owners do not realize is how much pressure that can place on margins and profitability over time.
Margin erosion rarely happens all at once. It develops gradually, often slowly enough that the impact is not fully appreciated until profitability has already been meaningfully affected. Revenue growth can mask that pressure for a period of time, making the problem even more difficult to identify.
Pricing flexibility also varies significantly by industry. Businesses offering differentiated products or services often have greater pricing power because customers are buying more than a commodity. In many service-based industries, loyalty and relationships create flexibility that business owners sometimes underestimate.
The opposite is often true in highly commoditized industries, where customers can easily find similar alternatives elsewhere. In those environments, margins require even closer attention. It does not take long for rising costs to turn what was once a highly profitable business into a much less profitable one.
Revisit What You Offer
An inflationary environment is also a good time for business owners to think about whether their offerings still make sense. Inflation often exposes weaknesses that already existed within a business.
Businesses can get caught in the trap of continuing to offer something simply because they always have. There can be a reluctance to disappoint customers or walk away from a familiar part of the business, even when the economics no longer make sense.
Inflation can reveal that certain products, services or clients are not truly profitable, but simply consume resources. Sometimes the answer isn’t raising prices, but instead focusing more time, energy, and capital on the areas of the business that create the most value.
Protecting Finances Starts With The Top Line
On the personal finance side, people often focus on reducing expenses or staying within a budget. While expenses matter, there’s a limit to how much spending can be cut. Increasing income can often have a far greater impact.
The same principle applies to businesses. During inflationary periods, many owners focus heavily on controlling costs. Cost discipline is important, but there is a limit to how much a business can cut its way to growth. Businesses that navigate inflation most successfully are often the ones that continue finding ways to create value, strengthen customer relationships and grow revenue rather than relying exclusively on cost-cutting.
Warning signs that inflation may be becoming a more significant issue include rising vendor costs, increasing wage pressure, shrinking margins or a growing share of revenue being consumed by interest expense.
Go Back To The Numbers Before Pressure Takes Over
One overlooked aspect of inflation is how it affects people emotionally. Inflation applies consistent pressure. As that pressure builds, it becomes easier to make decisions based on frustration, fear or urgency rather than objective analysis.
The problem isn’t inflation itself. The problem is that people tend to make worse decisions when they’re under pressure, and prolonged financial pressure can cause otherwise rational people to make reactive decisions. That’s why it’s so important to go back to the numbers and make sure the math still supports the decisions being made.
Under pressure, people become remarkably skilled at rationalizing decisions they would have questioned under normal circumstances. Businesses are no different. Expenses, vendor relationships, product offerings and staffing decisions can all begin to feel necessary simply because they have existed for a long time. An objective outsider can help challenge assumptions, ask difficult questions and provide a perspective that may be difficult to maintain from inside the situation.
Inflation is always in the background. The goal is not to panic about it but to plan for it, revisit assumptions regularly and make adjustments before pressure begins driving decisions.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
