Inflation is dealing businesses some heavy blows—small businesses even more so. During the pandemic, many struggled as product shortages, supply chain interruptions, and falling sales plagued the market. With these issues lingering more than a year later, rising inflation has quickly become more and more of a problem.
As of June 2022, the annualized inflation rate was 9.06%, far cry higher than the 2% per year goal set by the Federal Reserve. When the inflation rate gets too high, the cost of products and services tends to increase to the point where people begin to buy less. That’s particularly problematic for “nonessentials,” as those products are usually the first to get cut from consumers’ budgets.
As demand drops and order pipelines dry out, businesses, especially SMBs, will likely experience cash flow issues and might find it challenging to keep operating. With prices of raw materials also rising, this can exacerbate an already precarious situation. Businesses are left to increase prices to counter rising inflation and cover the cost of doing business.
Business expenses can climb even higher as the domino effect of increasing transportation costs, wages, and overheads, like rent and fuel bills, continue to rise. Combined, these factors result in lower profit margins for business owners, negatively affecting a business’s financial health if not, in extreme cases, resulting in closure.
Inflation Strategy: Navigating a Reversal of Fortune
While inflation is a constant occurrence to some degree, its current trajectory will level off. It’s just a matter of time. Time is rarely on your business’s side, however, and an inflation strategy can help better weather the storm. As far as inflation strategies go, you’re looking at three viable options.
One strategy to combat inflation is price increases, naturally. Many companies might be hesitant about raising prices for fear of outpricing customers. Forecasting that resilience is crucial but can be challenging to measure.
If not price hikes, product prioritization is another option for combating inflation. With this inflation strategy, you’re attempting to deprioritize less profitable items while focusing on those with higher ticket prices. You’re also prioritizing more profitable sales over purchase dates, which can cause strain on customer relations due to supply delays.
The third inflation strategy is to monitor changes in relative prices closely. A contributing factor to inflation rates is supply versus demand. As a result, not all prices will increase by the same percentage, especially when economic conditions are volatile as they are now.
The primary benefits of all these strategies are increased resiliency and agility. Your business will be in a much better position to respond to fluctuations in the inflation rate — but there is a caveat. With market conditions changing daily, visibility can become an issue. You need to know what is happening in real time to respond appropriately.
Automation and Its Role in Combating Inflation
Automation is often seen as a means of freeing up employees from those mundane, time-consuming tasks. That much is true. And with the extra time, finance teams can shift their focus toward more value-adding strategies. They can start thinking outside the box and offer innovative ways to protect companies from rising inflation.
On top of that, however, digital finance and automation tools also offer teams access to real-time data, gaining greater visibility into your organization’s financial standing. If your company’s finance function is visible, more departments can be aware of the financial state and contribute to the overall strategy.
Take, for example, your marketing department. If the team was privy to market conditions and pricing information, they could offer more insight into positioning your products and messaging for your target audience. It adds a layer of relevancy to your communications with customers, which can help with sales.
The Benefits of Utilizing Automation
While automation does require teams to adjust their approach to work, the impact can be felt almost immediately. It can streamline workflows and allow employees to work smarter, if not deliver better results. Here are just a few advantages you can expect:
As already mentioned, automation can free up your finance team to tackle situations head-on. Their time is no longer consumed with manual, repetitive tasks. At the same time, however, finance automation also improves data accuracy — less chance of human error, after all. With the extra time and reliability of the information available, your finance team can move from back-office work and offer strategic advice on various situations. The decision-making process improves exponentially.
With automation, your entire executive team gains a clear view of your company’s financial health. You can think of it as a 360-degree view of a company’s financial operations.
Not only can your finance team make more informed decisions, but managers, directors, and C-level executives can also. With increased transparency and visibility across the organization, few questions remain about your financial standing, ensuring no one is ever caught off-guard. Besides, a digital finance platform centralizes financial data, making it more accessible and reliable. Everyone is working off the same information.
With real-time data and updates now available, you establish a companywide understanding of your current financial health, market conditions, competitive analysis, and more. This allows your finance team to make faster and, more importantly, informed decisions.
Inflation is a constant, and the rate either weakens or strengthens the economy. The choice is up to you in how to respond. You can try to maximize your profits by increasing prices. You can also try to combat inflation by reprioritizing your products. Then, there’s always the option of using relative pricing to inform your next moves. Regardless, you need data to ensure that the choice will be strategic, and automation is often the answer.
Alex Cedro is the Senior Finance Executive at Tipalti, a payment automation software that helps businesses manage their entire supplier payments operations by streamlining all phases of the AP and payment management workflow in one holistic cloud platform.
Equities News Contributor: Alex Cedro
Source: Equities News