Staying Cool If Inflation Heats Up

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Because if Laffer's predictions come true, tracking costs will become more important than ever. We've gotten pretty lazy over the past 20 years, what with inflation hovering under 3%. But in an inflationary environment, everything, from materials to labor will be going up. Fast. And we're going to need to keep a very wary eye on margins. Because to keep up with the Joneses, and to stay profitable, we may be forced into raising our prices often. We need to be focusing on our job costing systems right now and making sure we're getting real time gross profit reports, along with alerts when margins fluctuate beyond the norm.

Using CRM Systems

And once we've checked our accounting systems, we need to also check our Customer Relationship Management (CRM) systems. Good CRM systems will enable us to pull together groups of customers, by product, industry, region, and other variables and communicate to them price increases or other issues. We don't want to be scrambling to find these customers when we suddenly realize we've been losing money on them. Smart business owners are right now going through their customer databases and cleaning up contact information. They'll use their CRM systems to communicate or, at the very least, to export data for a mailing house or e-mail service to get out the word.

A few clever people I know plan on using their CRM systems to turn the fear of oncoming inflation into a potential sales opportunity. As we watch the key indicators such as oil, steel, copper, interest, and consumer price indexes rise, these resourceful people will be letting their customers know, through newsletters, e-mails, and phone calls that a storm is brewing. Sound the alarm, they'll say. Inflation is coming back! Buy our wares and our widgets now, before prices go up! And customers will do this. Because no one wants to pay more for something tomorrow that they could've just purchased for less today. Case in point: the Postal Service's forever stamps. I just stocked up. If only I could have found—yup, you guessed it—Fonzie stamps.

Purchasing Practices

If Laffer's predictions are correct, then our buying practices will need to change quickly. I'm already seeing some of my counterparts haggling over long-term contracts with their suppliers over agreed-on prices. Maybe they're on to something. Maybe now's the time to buy that piece of equipment or technology instead of waiting. Because if we wait too long, prices may have risen too much. Maybe now's the time to set up some bartering arrangements with our suppliers and service providers. That enables us to establish our own noninflationary currency with each other. Maybe now's the time to consider that building or land purchase as an inflation hedge, especially while interest rates are still relatively low. Maybe now's the time I should get that hair weave so I can look more like Zac Efron.

Well, maybe not. But here's one thing I'm personally going to do: hire a financial advisor. I know that cash is king, but not when there's high inflation. During these periods, cash balances can lose their value almost as quickly as Conan O'Brien has been losing viewers. I should be keeping as little cash on hand as possible in my business. I should be taking investment positions in more profitable vehicles for these times, like gold or real estate or Jon and Kate's public relations firm. Unfortunately, like many business owners, money management is not my strong suit. I'm not interested in making a killing in the market. I just want to run my business and make sure that my cash is not depreciating because of economic factors like inflation. I'm perfectly capable of depreciating my company's cash on my own, thank you very much.

These are all things that small business owners should be doing. But other than eating too much red meat, drinking too much coffee, and questioning our government's actions, is there anything else that we shouldn't be doing?

Keep Employees Safe

Yes. We shouldn't be using the threat of inflation to take advantage of our employees. Inflationary times are the worst for people on fixed incomes. We should avoid the temptation of locking in long-term, fixed employment agreements that could put them at a disadvantage. It's not human, and it's not good for business. Our people are our biggest assets. Instead we should be moving ahead with those discretionary bonus or profit-sharing plans we've been considering over the past few years. This way we can keep salary increases as low as possible while tying in other compensation to overall company profits. And if we believe Laffer, then we should also be budgeting now for cost-of-living increases.

Laffer, and other prominent economists are warning us that inflation and high interest rates are on the way. Of course there's no guarantee. But I'm a Happy Days fan. And I've learned from the Fonz. He says to be cool. And I will be. I've learned that, as a business owner, survival isn't just about what we're doing about today's problems. It's about how we plan to deal with tomorrow's problems. High inflation and interest rates may be on the horizon. I'll handle that. It'll be like jumping over a big tank of live sharks. Like the Fonz did. Ayyyy.

Gene Marks, CPA, is the owner of the Marks Group, which sells customer relationship, service, and financial management tools to small and midsize businesses. Marks is the author of four best-selling small business books and writes the popular "Penny Pincher's Almanac" syndicated column. He frequently speaks to business groups on penny-pinching topics. More penny-pinching advice from Marks can be found at www.quickerbetterwiser.com.

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