Navigating the Perfect StormBy
Businesses have faced many unforeseen issues for the past few years and survived. Now all sectors of business face a new challenge: inflation.
When envisioning a “perfect storm” scenario, the factors in the mix are typically a chance set of circumstances that blend to create a difficult or disastrous or catastrophic result. Enter 2022, when a combined set of events resulted in climbing inflation around the world. It actually began with the COVID-19 shutdown around March 2020. During this time, employers were forced to dismiss workers, meet new regulations for safety, and change the way business was done–less in-person engagement and a more distributed workforce. In the tightrope walk that ensued, how have small businesses coped with the evolving circumstances?
Most organizations applied to receive financial assistance to cover wages, rents, etc., when people weren’t working and space wasn’t being used. These funds were provided to help consumers continue buying and to keep the economy growing even when goods and services were unavailable. Small businesses worked hard to adapt to the lack of workers (labor inflation) and reduction in production of goods (supply inflation). As many companies closed their doors, their employees in the United States and elsewhere sought extended unemployment benefits, leading to inflationary cost of capital.
When restrictions were lifted mid-2021, a glimmer of sunny skies appeared with economic potential. Right away, however, the tsunami of supply chain issues hit. Lack of workers on site contributed to reduced production and an inability to ship and deliver during this time. As demand exceeded supply, three iterations of inflation spiraled.
Labor and wage inflation occurred as fewer workers were filling vacancies and employers were pressured to pay higher wages to try and get back to pre-COVID levels of availability for goods and services, often driving cost-push inflation. This price inflation meant fewer goods could be bought due to the lack of employment and shortage of supplies.
LABOR AND WAGE INFLATION
In the U.S., the approximately 11 million jobs available combined with a low unemployment rate to drive wages up. Yet jobs aren’t being filled. Many other countries have continued providing government assistance to their citizens to cope with factors contributing to their labor and wage inflation. For instance, Germany is providing a onetime payment of €300 to help with energy costs. Australia provides assistance to employers per austrade.gov.au, and workforceaustralia.gov.au helps workers find jobs and obtain some financial assistance.
Wages aren’t the only impact on employment. According to a Monster survey of 1,000 employees in the U.S., 34% said their job affects their mental health with 41% experiencing anxiety, 24% depression, and 12% physical illness. With fewer workers, the ones still working are showing signs of stress— feeling overworked and underpaid, having limited resources, and being unable to unplug. This contributes to lower productivity.
In addition, the best job seekers are pursued for the same positions. While small businesses want to hire, going from interview to hiring can take many months due to economic uncertainty such as new outbreaks of COVID-19, new regulations, new taxes, and supply availability to allow a continuation of business. Businesses often reach out to hire a candidate to find out they took another position. Then the hiring cycle starts again.
Small businesses hoping to address these challenges can make an extra effort to support workers, keeping them engaged and connected to the business. For example, managers can minimize multitasking requests and allow time for request fulfillment. And if a company provides food or beverage benefits, it can continue offering this option even if it means cutting back on choices to reduce costs. Providing individual recognition benefits such as movie tickets, early Friday time off, or late arrival Monday mornings vs. across-the-board incentives can also be a cost-effective approach. Whatever the methods, it’s important for retention vs. a cycle of retraining to look for ways to help reduce employee stress and provide work flexibility.
Pent-up consumer demand for products not available during the pandemic has caused prices to soar around the world, as supplies are still being replenished and aren’t back to normal levels in all areas of the world. Turkey, for example, had the highest inflation of all countries at 54.8% at the time of writing. And according to a new report by Natasha Turak of CNBC’s View from the Gulf, the annual inflation rate was 78.62% for June 2022, according to the Turkish Statistical Institute, surpassing forecasts. That’s the country’s highest annual inflation reading in 24 years. The monthly increase was 4.95%.
According to a financial market commentary in the U.S., driving a May 2022 increase in prices for goods was a 5% increase in energy prices, with prices for gasoline advancing 8.4%. Energy prices are up 45.3% since May 2021. More than half of the increase in prices for services was attributable to a 2.9% increase in prices for transportation and warehousing services. Energy, fuel, and delivery costs have driven up prices worldwide.
Organizations have everything to gain from making calculated decisions in response to these unfavorable conditions. First, conduct a data analysis and determine loss leaders and profit makers. Focus on those profit makers and confirm what can be supplied. Every business doesn’t need to provide extensive choices, so now is the moment to reduce or eliminate cost drains. Companies can also benefit from partnering with competitors and pooling resources for purchasing power or outsourcing if the cost makes sense. View all line items for elimination, better use, and better costs—especially office supplies—and make more of your reports paperless. Buy local to reduce delivery costs. Consider going back to stocking inventory vs. Just-in-Time to reduce the additional fuel and delivery costs. And continually examine consumer interest and change your business products or services to meet that interest, as appropriate.
As more currency has been made available, each monetary unit has become less valuable. Therefore, that unit isn’t “buying” as much as before. The currency value shrinks, even as costs increase for goods, services, and the cost of borrowing. Though this is driven more by governments than the private sector, there’s still room for an organization to be responsive and agile.
It’s more important than ever to build a six-month cash reserve. Manage cash to avoid any overdrafts, usually $30 per return item, which could be an employee hourly and benefit amount. Eliminate excess or obsolete inventory—free up cash. Know and provide ratios for turnover to show money management, which may influence potential investment either from your bank or another investor/partner. And finally, know where the majority of the money is spent, the expected returns, and have a plan of action to pivot quickly if returns diminish or products or services aren’t readily available.
When a perfect storm hits, the small businesses that survive do so by cutting back on unavailable products, low margins, or on services not providing value. Companies can’t be all things to all customers, and it can help to zero in on one service or product with the needed margin and availability while increasing customer appreciation for the value charged. Keep your employees, shareholders, and bankers informed to avoid gossip and misinformation. Smart strategic decision making can help companies get through this global economic inflation stronger.