Accounting / Are You Worried About Inflation?

Are You Worried About Inflation?

When inflation is at play, the decline of the value of money and the incline in prices is a combination that impacts everyone. Not even business owners are spared from the stress of an inflationary environment, especially when it comes to today’s post-pandemic world.

The COVID-19 outbreak, in combination with new predictions of an upcoming recession, has created a novel type of environment that can be described as VUCA:

  • Volatile: This refers to the unexpected yet frequent occurrence of uncontrollable events, such as financial crises, political uprisings, social upheavals or natural disasters.
  • Uncertain: It is difficult to predict what the outcomes will be during volatile times. For instance, two experts could analyze the same data and come to different conclusions.  
  • Complex: The digital world has made it increasingly difficult to accurately connect a cause to an effect.
  • Ambiguous: The information that is available is often too incomplete, contradictory or inaccurate to be deemed reliable or trustworthy.

Trying to make plans when you’re working with an inflationary environment can be very overwhelming. However, there are three strategic steps businesses can take in  present time to cope with what could happen in the future.

Step 1: Focus on the challenge

As a business owner who is operating a company in a VUCA environment, the main challenge is creating a long-term plan that is both supported by standardized actions and flexible enough to respond to circumstances that are outside of your control. These situations can be positive or negative.

An example of a positive situation is the increased demand for supplies that respirator manufacturers faced throughout the pandemic. Alternatively, an example of a negative set of circumstances is the decreased demand for dress attire during the COVID-19 outbreak.

The best way to plan for fluctuations such as these is by integrating flexibility within your planning process. This can be done with the use of best- and worst-case scenarios. You can start by asking yourself the following questions:

  • What would happen to your cash flow if X was the situation?
  • How can your company minimize the number of risks it takes?
  • What positive actions can be taken?

Company leaders can seriously benefit from utilizing a dashboard that allows them to track fluctuations in key metrics on a daily basis. Furthermore, forecasts should be reviewed at least once per quarter to ensure that the company is competitive and on track.

Step 2: Pay attention to tracking

Next, make sure your company is not only tracking the right information but also analyzing it correctly. Determining where you can obtain reliable information is critical.

There is a lot of misinformation out there, and company leaders need to take on the responsibility of identifying trustworthy sources. Once that is complete, these leaders will need to determine which data points are worth monitoring so they can make the best decisions for their companies.

Information that is important to keep track of includes, but is not limited to, the following details:

  • Monitor a dashboard of key metrics. By doing so, they should be able to spot trends that could impact the company. With this information, they might be able to make the necessary adjustments as quickly as possible.
  • Pay attention to industry competitors. This includes brands that could potentially enter the industry in the future. If a close competitor lowers its price, refrain from automatically following suit. Instead, respond by looking more closely into whether it has a new supplier or a substitute for a raw material.
  • Keep an eye on the purchasing behavior of customers. If something changes, stay agile and respond accordingly.
  • Prioritize the company’s online reputation. Customer reviews provide insight into how the company is perceived, whereas employee reviews play a different role. Positive reviews can help businesses attract top talent, while poor reviews can lead to high turnover rates, which could also prevent the company from being able to attract new talent.

Step 3: Consider the tactics at play

Now it’s time to begin implementing tactics that work. Ironically enough, these tactics are typically effective during both inflation and a recession.

Adhere to these words of wisdom when applicable:

  • Review cash flow. Cash flow is key. Look at receivables and collect outstanding invoices. Analyze payables and minimize the number of them that are set to automatic so the timing can be better controlled.
  • Evaluate operational processes and procedures. Look for ways to make the company more efficient and effective.
  • Analyze the profitability of every department. In doing so, do not make cuts automatically on that basis alone. Some functions, such as marketing, are necessary to the future of the business even if they are not as profitable as the company would prefer.
  • Communicate effectively. Good communication is a requirement. Take measures to always keep employees, suppliers and customers in the loop.

How can BlueStone Services help?

It can be easy to lose sight of your company’s goals during disruptive times. Consult with our professional advisers who can offer both advice and an outside perspective. Our outsourced accounting solutions can review your taxes.

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