Market Perspective

Inflation in Perspective: How Smart Businesses Can Adapt to Rising Costs

August 4, 2022
The C2FO Team
A closer look at inflation in perspective

As inflation rises, businesses must adapt to increasing costs and find ways to protect their margins. Here's how.

Inflation continues to soar. Around the world, 82% of businesses say they are facing higher costs and lower margins, with the price of labor, materials, energy and rent increasing rapidly. 

The consumer price index (CPI) — a measure of the prices consumers pay for products — recently soared to an annual rate of 9.1%. Meanwhile, the producer price index, a measure of the prices paid to producers of goods and services, reached an annual rate of 11.3%. 

Raising prices might be the first option many businesses consider, but there are other tactics you can use to mitigate rising costs. 

Why businesses are on alert

Corporate executives are taking a dim view of their prospects, with a majority now expecting a recession, according to the Conference Board. In fact, the board’s C-Suite Outlook 2022 survey results showed that inflation has jumped to the second-highest external threat to business, up from its previous 22nd position.

What makes inflation so complicated is that it’s the result of several connected issues. These include:

1. Labor shortages

The ongoing labor shortage is having far-reaching effects on the economy,  from heightening inflation and supply chain disruption, to driving up labor costs and amplifying competition for qualified workers. As the shortages continue, the current market is forcing companies to increase employee pay. That, in turn, can intensify inflation. This is particularly challenging for small to mid-sized businesses, which often have tight labor budgets.

2. Supply chain disruption

The pandemic disrupted supply chains, and the war in Ukraine has exacerbated the disruption by causing shortages of commodities, such as oil and natural gas, which are used in the production of many other goods. 

Shortages and logistical bottlenecks have contributed to inflation as supply-constrained goods’ prices rose in response to pent-up demand following a recovery in household spending.

These shortages and disruptions mean fewer items are available for purchase, with longer wait times for orders. When supply is limited, consumers are often willing to pay more to obtain the item — as outlined in the economic principle of supply and demand. As a result, prices increase due to demand-pull inflation.

3. Strong consumer demand

Inflation typically increases coming out of economic downturns as consumer demand outpaces supply, but this trend was compounded by the COVID-19 pandemic. Demand for many goods dropped in 2020 and remained lower into 2021 as further waves of COVID-19 triggered lockdowns and other government restrictions on consumer behavior. As cases dropped in the spring of 2021, many restrictions were lifted, which caused a significant surge in demand.

4. Surging exports 

International trade plunged in 2020 due to the COVID-19 pandemic but recovered sharply in 2022. The gradual lifting of restrictions and the introduction of stimulus packages boosted the recovery of economic activity, leading to an increase in demand for commodities and record-high surges in exports.

5. Crop-destroying weather

In recent years, unprecedented weather disasters have caused the price of key commodities to spike. Last year, the US had its hottest summer ever, breaking the record from the summer of 1936. Searing heat combined with a record-breaking drought brought hordes of grasshoppers, which ravaged wheat crops. As a result, wheat prices reached the highest level in years. Corn prices also rose 45% last year.

All of these factors mean that the current inflation and economic landscape is unique. The labor market is unstable, consumer demand hasn't dropped the way it did in 2008 and supply chains are strained.

What you can do 

Despite the rising costs and interest rate hikes, your business can meet these challenges head-on. Here are some measures you can take that may ease the effects of inflation on your business:

1. Cut costs

One way you can tackle inflation is to review your business expenses and identify where you can cut costs. Are there services or tools you no longer use, or can you scale back your usage? Look for places where you can save on expenses that are no longer essential for your business.

2. Pass price increases downstream

According to a 2022 Small Business Index report, 67% of business owners surveyed increased prices to adjust to inflation. This is a feasible solution, but ensure you use sound judgment with your pricing increases and be transparent because dramatic changes can risk alienating customers.

3. Absorb prices into profit margins

Absorption pricing is a pricing strategy also known as full costing. It requires capturing the variable costs and fixed costs associated with manufacturing a particular product. Absorption pricing can be used to determine the long-term price of a product that is needed in order to pay for all expenses, therefore helping your business maintain profitability over time.

4. Negotiate new supplier agreements or change suppliers 

Review supplier agreements for potential ways to offset rising costs. You may be able to negotiate better contractual terms with your suppliers. Contractual factors to assess include the contract term, indexing, frequency and limits of price increases. Inflation affects everyone, which is why suppliers are usually willing to have a conversation about how to share the burden of rising prices. Failing that, you might look into switching to another supplier for a better price. 

How C2FO can help

One thing to remember is that you don’t have to face these challenges alone. C2FO has several tools that can enable your business to thrive during this difficult market:

  • Accelerate payments using dynamic discounting, a flexible early payment solution that lets you select invoices for early payments and set discount rates. 

  • Shorten your cash conversion cycle. This means you’ll have funds on hand to pay your accounts payable, enabling you to strengthen your balance sheet and meet key metrics.

  • Boost your working capital, so your business can pay down debt, offset costlier shipping and production, or invest in innovation.

Using these strategies, you can strengthen your company’s financial position and improve its resilience to respond to evolving market conditions.

The infographic below offers a visual breakdown of the inflationary environment in 2022, its potential impact on the end of the year,  how it compares to historical trends, as well as advice on navigating what’s ahead. 

What You Need to Know About Inflation With rising costs and interest rate changes ahead, your business can meet challenges head-on.  82% of companies worldwide are seeing higher prices for wages, raw materials and more.   #2  Inflation is a huge concern for CEOs, second only to the pandemic.  How long do CEOs expect increased pricing pressure to last?  Until mid-2022 / 10% Until end of 2022 / 35% Until mid-2023 / 24% Beyond 2023 / 31%  Causes Labor shortages   Supply chain disruption  Strong consumer demand Surging exports Crop-destroying weather  Though 2021 inflation set 40-year records, the current upswing in the consumer price index is not expected to reach the heights of 1980 (13.55%) or 1974 (11.05%), according to the Federal Reserve.  How are businesses planning to respond? Cutting costs Passing price increases downstream Absorbing prices into profit margins Changing suppliers  You have more options with C2FO.  ACCELERATE PAYMENTS Dynamic discounting is a flexible early payment alternative that lets you select invoices for early payments and set discount rates.  BOOST BALANCE SHEETS Shortening your cash conversion cycle means you’ll have funds on hand to strengthen your balance sheet and meet key metrics.     REALIZE POTENTIAL With more working capital, your business can pay down debt, offset costlier shipping and production, or invest in innovation.  Sources: Conference Board C-Suite Outlook 2022, U.S. Bureau of Labor Statistics

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