Inflation is here. Is your business ready?

Savvy business owners should consider prioritizing initiatives and expenditures that will yield the most bang for the buck, and shelving those that might be less core to the business plan.

Last August, a derecho tore through my community in Cedar Rapids, Iowa. Winds reaching 140-mph slammed a tree through my roof and flattened about 60 percent of the oaks on my property. Compared to nearby farmers whose crops were destroyed, we were very fortunate but repairs were certainly needed. After some emergency fixes on the battered roof, we got an estimate for a full restoration and decided to do the work this summer.

Bad idea. The estimate is now 30 percent higher. If I wait longer, the bill is almost certain to rise. 

Why? Inflation. 

While the pandemic’s supply chain disruptions forced prices higher on supplies and labor, the threat of inflation is a much more troubling concern. Business owners should probably start planning to hedge against the threat; there's a strong chance it's going to get worse before it gets better.

In June, the Consumer Price Index, which tracks consumer prices, soared 5 percent from the same period a year ago — higher than many economists had expected. The parlor debate about whether that’s a blip or a sign of a sustained rise in prices and a harbinger of recession will be decided by any number of factors, including how much stimulus the government continues to pour into the economy and how much and how quickly the labor market rebounds from a year in deep freeze.

Planning for the worst

Even so, I view measures such as the CPI as lagging indicators, so savvy business owners should be operating under the assumption that inflation is here to stay, and adjust their operations accordingly.

That might mean rethinking how you invest your free cash flow. Odds are, you'll want to have more cash on hand than you would in a non-inflationary environment. It might be time to review that rainy day fund – or set one up if you don’t have one already. Do you have enough to maintain operations during possible lean times ahead? 

CEOs and CFOs should consider prioritizing initiatives and expenditures that will yield the most bang for the buck, and shelving those that might be more speculative and less core to the business plan.

In some cases, firms may want to revisit that plan itself. That could entail scaling back growth initiatives, or at least layering in contingencies to take effect if inflation becomes as bad as I fear.

The supply-demand imbalance in both goods and labor could work itself out. And if it does, and an inflation-induced recession is avoided, so much the better for us all. But if that is the case, business owners who take my advice will find themselves leaner, more focused and better financed than their competitors. There are worse fates!

For more information about how I can help you plan for economic headwinds, please reach out to me here or at https://www.americantbp.com/contact-american-tax-and-business-planning.