Saturday, July 5, 2008

Inflation/Recession strategies

Being a business owner means predicting the unforeseeable, making adjustments on the fly and dealing with ever-changing market conditions. Inflation is looming as a threat today. While nobody can predict the future. There are ways to cope should inflation become a reality.

Just-in-time inventory management (ordering just what you need as you need it) is a good way to go in a relatively stable or declining price environment. During periods of inflation, bulk buying makes more sense. If you have product on the shelf that you purchased at $1/unit and your next shipment runs $1.50/unit, with just-in-time inventory management, you adjust your retail price accordingly and just keep up with the increased costs. If you have a large inventory on hand at the lower price, you can adjust your price immediately, increasing your margin on the previous shipment, or choose to stay below your competition for a time, giving you a marketing edge. Take advantage of bulk pricing and give yourself more price flexibility.

Cushion the blow. If you find you must raise prices you may be able to soften the impact by adding value or adjusting packaging sizes. You may choose to reduce quantity per package rather than raise package price. Conversely you may choose to up both the price and the quantity, saving some money on packaging and so reducing the price increase. You can add services, such as installation or extended warranty. You can package related goods together, or offer a free related or accessory product with the purchase.

Credit's tight. Capital can be hard to come by. But there are ways to generate cash flow without borrowing from a bank. Having a limited time big sale is essentially like writing yourself a 30 day loan (if you're on net 30 with your suppliers). You have to get the word out and you have to make it an offer that's hard to pass up (10% off is not going to get the job done). This is a very short term play and requires cash-flow discipline on your part, but it has the added benefit of generating customer traffic and buzz.

If you have fixed rate debt and your income is keeping pace with inflation, accelerating payments is not a good strategy. Your debt to income ratio is declining, providing you're not taking on new debt. Put any excess cash flow to work somewhere else. If you have variable rate debt, and you think inflation is on the horizon, now's the time to refinance to fixed rate.

A challenging economic environment can also present opportunities. Look for used equipment or special offers from suppliers. When suppliers have specials, they're generally signaling that they need cash-flow. Help yourself out by helping them out. Take advantage of sales and special offers. Look for estate sales and liquidations. Position yourself for the economic recovery now. When customer traffic increases, be ready for it.

If you've been putting off upgrading your website because you didn't have the time, and sales are currently down, you have the time. Get it done. The same is true for aesthetic improvements and maintenance inside and outside your shop or office. Consider this an economic "half-time". Don't spend it hunkering down. Spend it preparing for the next leg up. Work on new product ideas, get active in your networks again. Don't spend a lot of time conversing with peers about how tough things are. Pessimism breeds pessimism. Spend quality time with optimists.

I'm not an old man, but I've seen a few recessions and periods of enconomic upheaval. Every time, you'll hear predictions of the end of the world as we know it. Don't buy it. Staying positive, looking for opportunities and hanging tough through hard times will give you "street cred" as well as confidence. Both of which will benefit you and your business when the inevitable recovery arrives.

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