Build a Business Plan
to Combat Inflation
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Inflation is the danger around the corner if you listen to the pronouncements of the Federal Reserve. It is the price gouging and drive toward greater profits by big, mean cold corporations at the expense of the little guy according to the media. Inflation is a measure of the economic capabilities of the party in the White House, if you believe the guys believe the guysout of power.
But what inflation REALLY is relates to economics more than politics.
Inflation is the relationship between supply and demand of money. More specifically - for a certain currency. Governments point to business as the cause of inflation , but it is government that determines the supply of money - one half of the equation . The demand side is set by government and everyone else combined .
It pushes your capability of purchasing something, like a new car or house, out of your financial reach. It causes cost overruns on projects. And inflation touches virtually every person and business.
What can a company do to protect itself against the ravages of inflation?
Here's a few ideas to incorporate into your business plan.
Cushions Against Inflation |
|
| Periodic Sales Price Adjustments | Selling prices may be increased at short intervals to improve profit margins. |
| Catalogues and Sales Brochures | Publish price changes and distribute them quickly. |
| Long-Term Contracts | Have a " cost plus " provision in the contract tied to a price index. |
| Precious Commodities | Have an independent pricing mechanism for commodities that are subject to wide price fluctuations. |
| Basis of Selling Price | Selling Prices should be on a Next In - First Out basis, to better match them with replacement costs. |
| Price Quotations | Put a short time limit on estimates and price quotations. |
| Purchasing Contracts | Try to enter into longer term agreements to lock in prices. |
| Reduce Production Costs | Find better and cheaper methods of making products. |
| Component Costs | Avoid components which have excessive price increases. |
| Futures Contracts | Consider engaging in futures contracts to buy raw materials at current prices. |
| Competitive Bidding | Secure competitive bids for administrative items such as insurance and office supplies. |
| Marketing of Products | Emphasize marketing efforts for products that are inflation resistant. |
| Long Term Projects | Avoid projects with long payback periods. |
| New Products | Defer introducing unprofitable products unless design changes can make them profitable. |
| Automate production | Automated companies have an advantage over labor intensive firms in times of inflation. |
| Control Wages | Tie wage increases to productivity. |
| Minimize liquid assets | Hold a minimum in cash and liquid assets which will lose buying power. |
| Inventory Valuation | Use Last In First Out ( LIFO ) inventory method to get maximum tax savings. |
| Debt Payments | Do not prepay debt since you will pay in cheaper dollars later. |
| Insurance | Consider borrowing against the cash surrender value of life insurance since the interest rate may be lower than the prevailing rates. |
| Hedging | Consider buying futures to protect receivables from inflation loss. |
These are tactics which can help your business stay afloat during times of economic stress. They should be a key part of your business plan strategy when formulating your firm's direction for the future. They may be considered details - but details add up.
A Business Plan Must Adjust
to Market Conditions
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