Lead your business through a turbulent economy. | Bot To News

Author: Shannon Clinton

For both consumers and businesses, inflation has driven down the prices of everything from food and fuel to building materials, housing and vehicles.

According to a report from the US Department of Commerce released on June 30, the price index for personal consumption expenditures (PCE) increased by 6.3% in May 2022 compared to the same time last year, energy prices increased by 35.8% in the last year %, and food prices rose by 11%. According to a recent CNBC report, the PCE price index reached 6.6% in March, the highest rate since January 1982.
The report notes that inflation of goods increased by 9.6% and prices of services by 4.7%. The national average for a gallon of gas hovers around $4.76.

Add to that a persistent labor shortage that has spurred higher wages to attract and retain workers, and some companies’ margins are even lower.

With many consumers already feeling cash-strapped, more news of price hikes at their favorite restaurants, shops and service providers is unlikely to be welcome. So what should a company do?

We asked some economic experts to weigh in on their best advice for business people in the current inflationary economy.

Jose Fernandez is an associate professor of economics and chair of the economics department at the University of Louisville, and he said that when it comes to business operations, there are early and late effects of inflation.

When input prices — think components of manufactured products or ingredients purchased by restaurateurs — begin to rise, business leaders often feel the need to cover their margins by sharing the burden with consumers and raising prices, he said.

However, you risk alienating some of your customers who may leave in search of a better deal.

“Typically, just raising prices may not be the best thing to do unless you have a particular product where consumers are not as sensitive to price changes,” Fernandez said.
Some companies adopt a cost-plus pricing model, Fernandez said, factoring in their own cost of items to sell and marking them up with a fixed margin across the board. Instead, business owners should pinpoint which products are in high demand and consumers are insensitive to price changes, and focus on increasing margins on those products.

Business owners could also use this opportunity to reevaluate their product mix and be creative with the inputs they have to make even more products with higher margins, he said.
Fernandez noted that business owners must also consider that their employees, who are also facing price increases in many aspects of daily life, may also demand higher wages.

Be proactive
Brad Smith is the managing partner of MCM CPAs and Advisors, a tax, accounting and advisory services firm with offices in Louisville, Lexington, Indiana and Ohio. Smith mainly works with the manufacturing and distribution sectors.

Smith said that inflationary pressures usually cause a rapid withdrawal of hiring, but today there are still more jobs available than people to fill them.

While there are many predictions about how long or deep this inflationary cycle could go, Smith said that’s just speculation, especially given the confluence of the global pandemic, supply chain disruptions and labor cuts.

Still, he said the economy has sparked concern among his clients, who worry about what the bottom line will be.

As the rising costs of doing business are passed on to customers, business leaders must ask, “At what level is the ceiling or tipping point of what can be passed on or not?” he said.

Timing is also a factor in how quickly companies need to respond to rising prices. A shorter lag between the increase in the company’s costs and the ability to recoup the added costs due to increased market prices is better for the company. Later, if prices drop, price adjustments can be reconsidered.

Smith’s advice is not to panic, but to be proactive in conducting a risk assessment to determine what steps need to be taken if certain events do occur. He likes to see client companies plan ahead and be disciplined about maintenance and cost control in good times, a practice that pays off when times are tougher.

“In my experience, the companies that have been most successful maintain that discipline as much, if not more, in good times than in bad times,” he said.

Track costs
In the office of Blue & Co. LLC in Lexington, Ryan Graham is a CPA and Director of the Audit Department, working primarily with clients in the manufacturing and distribution industries.

He urges business leaders “to monitor costs and not hesitate to pass on these increased costs to customers, preferably more often than in the past.”

“Where there has traditionally been an annual price increase, a semi-annual or even a quarterly price increase/adjustment may be necessary,” Graham said. “Today more than ever, transparency with customers is key.”

He said it’s also important to pay attention to lower-margin business areas and prioritize high-margin products when possible.

As lending rates rise, it’s critical to monitor business lines of credit and budget for potentially higher interest charges in the coming months or even years, Graham said.

Although inflation will affect all businesses, Graham notes that it will certainly affect some more than others and that different parts of the economy will experience different rates of inflation. For example, fuel costs have risen faster than other aspects of the economy, so companies with high transportation costs will feel the effects more.

“Re-evaluate business processes and procedures to determine if there is an alternative approach or input that could be used to reduce costs and increase margins,” he said.

The importance of communication
Thomas H. Carver is a CPA and Director/Commercial Product of FORVIS Tax, Audit and Advisory Services in Louisville. Carver says that if we’ve learned anything over the past two years, it’s that any early estimates of how long an economic problem will last are “almost always too optimistic.”

Last fall, some economists predicted a return to normal supply chains and projected inflation by the end of this year. But now, “the likelihood that we’ll see any semblance of pre-pandemic supply chain and inflation levels by mid-2023 is getting smaller every month,” he said.

FORVIS customers have taken a variety of approaches to mitigate these issues, Carver said, with many trying to move away from international suppliers to alternatives in North America to increase reliability and reduce transportation costs. Still, even domestic freight costs have risen dramatically, he said.

Some lucky customers have the space, capital and ability of suppliers to buy inventory in advance and in large quantities, taking advantage of price discounts to overcome anticipated future cost increases, he said.

“However, after decades of lean inventory process improvements, many customers have reduced warehouse space and no longer have the available square footage to store excess inventory,” he said.
As a result, companies raised prices to protect their margins, Carver said. He, too, emphasizes the importance of informing consumers about price increases.

“Most customers are looking for an explanation,” he said. “They want to understand the background of why costs have gone up, rather than feeling like you’re taking advantage of the situation and pushing for big increases.”

Understand the impact of price increases
Michael Clark, director of the Center for Business and Economic Research at the University of Kentucky’s Gatton College of Business and Economics, believes the Fed “should have slowed down the economy a few months earlier than it did.”

“This could moderate some of the price increases we’re seeing,” he said, adding that most economic forecasters expect inflation to moderate by the end of 2021.

He was once among them, emboldened by the distribution of the covid vaccine, the reopening of schools and the return of workers to the workplace, increasing production and improving supply chain issues. Clark said there was a fear at the time that the rate hike might have severely slowed the economic recovery.

“But those predictions turned out to be wrong,” he said. “In hindsight, an early rate hike would have helped moderate inflation over the past few months.”

Given the resulting rate of inflation, business leaders should ensure they fully understand how large and unpredictable price increases can affect their bottom line.
“Many companies have to price inputs or outputs months in advance,” he said. “This can be extremely risky as prices could quickly move differently than you expected, reducing profit margins. Some companies, such as building contractors, may be able to pass some of the uncertainty on to their customers by having flexible material prices in their contracts instead of fixed prices.”

Companies that can find ways to increase production of goods and services to take advantage of higher prices — the lumber industry is a good example — can provide a strong boost and temporary opportunities for some, Clark added.

The causes of inflation are somewhat unique this time, Clark said, given the impact of the pandemic and the ban on Russian oil after Russia invaded Ukraine. As a result, it is difficult to estimate how long high prices will last.

The economy is actually in a strong position, with low unemployment and high job openings, said Pamela F. Thompson, managing director of Mariner Wealth Advisors, which has offices in Louisville, New Albany and Cincinnati.

“A tight labor market has put downward pressure on wage growth, adding to inflationary pressures created by supply shortages from the pandemic and the war between Russia and Ukraine,” Thompson said. “This ‘perfect storm’ has led to year-on-year CPI inflation at its highest level in 40 years, which in turn has led to significant increases in interest rates.”

While some degree of recession is likely, he expects the Fed to end or close to raising interest rates by the end of the year.

“Although the economic impact of rising interest rates occurs with a lag, it has already begun, so we would expect the recession to end sometime by mid-2023,” Thompson said. “As far as financial markets go, they always move ahead of economic data, so with the Fed easing and hopefully the outlook for inflation going down in 2023, we’re cautiously optimistic that it could actually be a strong year from 2023. market and investment perspectives.”

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