If you didn’t live through the hyperinflation of the 1970’s, you might be caught napping!
For the fifth time this year, I met with a business owner about to face an avalanche of trouble. Business is booming for these people. Their order books are full. Their future looks great. But their contracts were let based on traditional (often already too thin) margins.
Their trouble comes from the rapid onset of inflation. And it’s not the same as the Consumer Price Index (CPI) as reported in the headlines. This is the inflation of the input prices for business. Some businesses are facing crazy price increases for many important input items.
Energy, contractors, vehicles, deliveries, concrete, steel, timber, virtually anything imported and of course, people. All jumping up beyond the CPI. Have you tried replacing those critical employee gaps yet? Yes, this hurts … and it’s going to hurt more.
What is causing this?
Shortages in supply have had a chain reaction effect. They bounce and ricochet throughout the world …caused by invasion, food shortages, oil supply in Europe, shipping containers stuck on ships, sun not shining and the wind not blowing in the UK, microchip delays, and of course, Covid.
Yes, Covid still impacts our businesses here in Australia. We constantly have meetings changed and cancelled when attendees can’t make it. My two favourite local restaurants both closed this month because of it. It might be the milder version of Covid, but Omicron disrupts us all even more. Everything is delayed and everything is more expensive.
I recently tried to re-book a hotel in Boston for almost the exact same date as my last visit. An expensive city – true. Last time I stayed … $326 per night. This time … $820. Everybody wants to travel, not enough hotels.
The threat for business?”
If your costs climb and your prices don’t adapt, your margins are eroded. Eventually you stop making money. As losses grow, it becomes too late to fix. Money runs out and business comes to an end.
Simple.
“But Chris, we have signed contracts … our reputation is on the line … we can’t just go and change these”.
If you don’t do something, you may not be in business to finish the contracts. Let alone honour the warranty. Fixed price building contracts are probably the worst.
It is clearly important that businesses re-price their goods and services to reflect the prices that they will be soon paying (not the prices that they are already now paying or the price that was paid for the goods in the warehouse).
Sometimes a conversation with customers is all that’s necessary to get the pricing back on track. Sometimes you need to be tough. Everyone is in the same boat.
This is a pro-active, regular, and necessary course of action that is required for all businesses that seek to remain profitable and successful though this period of inflation.
When I was a graduate (some time back) I remember financial forecasts were always presented in two formats. Actual dollar format (the dollars to be paid and received in future years) and the exact same report in current dollar format (what those dollars meant in today’s money terms). Sounds weird but the world had become so used to inflation that even the accounting and reporting had to adapt.
Hopefully this current phenomenon is only temporary.
Our recommendation? Don’t be shy and remember, the people you ask to pay more are already asking their clients to pay more.
Be tough!
Chris Alp