When we were told "business leaders must always adapt to changing economic environments", nobody told us we'd be going on a post-Covid economic roller coaster ride.
And just when we thought we had experienced every rise, drop, and turn on the roller coaster, a new loop presents itself: stagflation.
What is stagflation?
Wikipedia defines stagflation as an economic environment in which the inflation rate is high, the economic growth rate is slow, and unemployment goes up.
In simple terms, stagflation is a sluggish economy with high inflation...and a tough environment in which to run a business.
Many small businesses go under during stagflationary times because inflation drives up the costs of doing business (raw materials, wages, rent) while demand for goods and services becomes stagnant due to credit tightening.
Business that adapt to stagflation find themselves better positioned for the economic boom that typically follows.
This is why it's important to consider and execute on the following ideas to survive and thrive in a stagflationary environment.
Automation
One of the best ways to deal with stagflation is by improving productivity.
And the best way to improve productivity is by investing in software and/or machinery that automates your processes and frees up employees' time to engage in more productive endeavors.
Automation is deflationary. Investing in it today can reap great benefits in the future as it pays for itself.
However, ensure that your team is committed to learning how to use new tools so they can make the most of their power.
Otherwise, your investment in automation could easily turn into just another expense.
Improve Quality and Service
Is your competition raising prices to offset increasing costs? If they are, this may allow you to raise prices as well.
But if you're going to ask customers to pay more for your product or service, make sure the quality of the product or service you offer is as good or better than the competition's.
Can you offer a better product than your competition? It's much easier to raise prices on products that are new and improved.
Can you offer better service by improving on lead times in the midst of a supply chain fiasco? Customers need to get something in return for the higher prices.
Minimize Debt and Stay Profitable
You want to keep debt low when interest rates are rising.
Are you carrying debt with a floating interest rate? Consider refinancing it into a fixed interest payment. This will cost you upfront, but it reduces the risk of not being able to service your debt in the future.
Also, take profit first.
Your revenue may slow while costs continue increasing during a stagflationary period. This doesn't mean you stop taking profit though.
Positive cash flow is the most important factor leading to your business's long-term success. Without enough money, your business can't take its message, products or services to the world.
And if you can't take your message, products, or services to the world, your business will likely crash and burn.
Profit is not an event. It is a habit.
Start taking profit first immediately. Take your very next deposit and allocate 1% of the total amount to a separate bank account nicknamed PROFIT. Do this with every deposit.
Over time, this habit will have you finding creative ways to increase your allocation.
Take profit first and then (this is important) get creative with what's left over.
In Closing
Stagflation sucks. But navigating these waters honestly gives small business leaders a chance to take a long, hard look at their businesses and adapt.
The sooner we adapt to this changing environment, the stronger we come out on the other side of stagflation.
This too shall pass. Entrepreneurship is a journey, not a destination. Enjoy the roller coaster ride.
As always, stay alert, stay educated, and most importantly, stay cool.
Talk soon,
Old Man Winter
