In January 2020, approximately $1.8 billion USD was in circulation. As of May 2024, that figure increased to approximately $2.3 billion.
In January 2020, the Federal Reserve’s total assets equaled approximately $4.2 trillion. Just six months later, they had grown to approximately $7.2 trillion.
We won’t delve too deeply into the economic impact of these figures, as you have already witnessed their most significant effect firsthand: inflation.
Rising prices have put the squeeze on many Americans lately, and have given much cause for political discussion (which we decline to take any part in). But if you own a business, then a political solution to inflation wouldn’t do you much good in the short term, anyway. You need to keep your business afloat today – not several years from now – which is why it is essential to understand how you can protect your profit margins during inflationary periods, such as the historic one we are currently occupying.
Shrinkflation
Shrinkflation is a simple solution to dealing with inflation. When the costs of materials and labor increase, a business can respond by spending less on them without reducing the prices of its products.
Take Gatorade for example, which recently shrank the size of its standard bottle from 32 to 28 ounces. The company’s representative explained that it made the switch because the narrower bottle is “easier to grab” – technically true, albeit not the real reason for the decision. In a similar move, several hotel chains have abandoned daily housekeeping services.
Exercise caution if your business practices shrinkflation. Customers are bound to notice when they receive a smaller (or effectively less valuable) product than they are accustomed to. They are generally willing to accept a smaller reduction, although an extreme one may harm their confidence in your brand.
Substitution
Does your business utilize an expensive material? Consider replacing it with a similar albeit cheaper one.
The most notable recent example of substitution was practiced by Unilever. By 2021, Ukraine had become the world’s leading exporter of sunflower oil. The Russian invasion had exactly the effect on Ukrainian sunflower oil production that you might expect, which is why Unilever began substituting rapeseed oil in place of it in 2022.
The caveat here is obvious: if you begin utilizing cheaper raw materials (or less skilled labor), then the quality of your product is nearly certain to decline. Make too extreme a change, and your business’s reputation will suffer for it.
Pricing
Raising prices for the same goods and services your business has always offered is an effective reaction to inflation. It only makes sense: the dollar is worth less, so you charge more to make up the difference.
This may go without saying, but we’ll say it anyway: customers do not like price increases. Even so, they will accept them if they understand that they aren’t a blatant cash grab. If you communicate directly with your clients, explain in advance that rising material and production costs demand that you increase your prices. Ensure them that the price increase is solely intended to maintain the quality of your product, and commensurate with the rates offered by other businesses in your industry.
People value earnest, direct communication. Give them that, and you’ll do much more than most of your competitors would bother to.
Monitoring
There’s no such thing as cruise control when you’re running a business. You must continually monitor sales, gross margins, cash flow and productivity if you intend to maintain your business’s competitive edge.
The cost of doing business may be increasing, but you still have just as many opportunities to monitor your business as you always have. Scrutinize your sales, and identify opportunities to increase them. Determine how the cost of goods is affecting your profit margin, and identify actionable steps to reduce consumption without compromising the quality of your product. Remain cognizant of your cash flow, and seek out opportunities to improve its health. Late payments, ineffective collection practices, and employee theft all have a marked negative impact on cash flow!
Sherburne State Bank has weathered two depressions and 17 recessions since our foundation in 1920. We owe our longevity to our flexibility, creative banking solutions, and foundational commitment to exceptional customer service. If you’re looking for a local bank you can trust regardless of whichever economic hardships your business must overcome, then we welcome you to contact us or visit one of our locations in Becker, Monticello or Princeton, MN today!
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