It’s no secret the Australian economy has suffered a series of shocks in recent times and the result has been an overwhelming increase in inflation, which in May reached its’ highest level since 2009 with the Consumer Price Index now at 5.1%.

There’s been numerous causes – the economic impact of the Covid-19 pandemic, massive government spending in response to Covid, rising shipping costs, global supply-chain disruptions and war in the Ukraine have all contributed.

Key questions Australian businesses are now asking themselves include how long will inflation last, how high will interest rates go, and how will it affect our profitability? Without a crystal ball there’s no easy answers, but even if inflation becomes the new normal there’s strategies that can help you deal with it.

1. Prepare By Updating Your Business Plan

One of the key challenges of inflation is its’ unpredictable nature – it may affect different areas of your business to varying degrees, and the magnitude of those impacts may ebb & flow over time.

By planning for a range of impacts, you can forecast ways to deal with what-if scenarios. For instance you could plan alternate ways to assign manpower to deal with wage rises, solutions for sharp increases in raw material costs, and ways to lower risk when economic conditions change.

Time spent planning means less time reacting when you’ve run out of time to plan.

2. Review Your Pricing Strategy

The easiest option would be to pass inflation costs directly onto your customers, but can you afford that? Nevermind the danger of your competition undercutting you by resisting their temptation to do the same, in a high-inflation economy you risk losing customers who simply can’t afford to pay those higher prices.

If your customers are particularly price-sensitive you do have options. You could for example strip features out of existing products or services, or lower quantities while keeping prices the same. Conversely, adding new features might allow you to position your goods or services as higher-tier offerings, which could open up appeal to a brand new audience.

Or you could change how your pricing works altogether. Moving to a subscription model would lower barrier-to-entry for new customers and perhaps make it easier for existing ones to stay onboard. Investigating new pricing models while there’s still time to do so, and before such decisions are forced upon you will probably lead to better outcomes.

3. Lower Your Costs Intelligently

Lowering costs is a great way to avoid burdening your customers with higher prices. Of course the trick is to shy away from removing anything vital to generating income.

With that in mind you may wish to avoid cutting:
• Top-performing staff who know their jobs backwards, especially salespeople
• Marketing, since you’ll need to bring in new business to replace lost customers
• Anything that generates positive cash flow.

What are some common areas you might safety cut costs?
• Underperforming product lines or departments
• Leasing costs if work-from-home becomes an option
• Renegotiating any outdated contracts
• Areas of inefficiency inside the business, in terms of processes & people

4. Eliminate Or Automate Work

Few businesspeople relish the idea of laying off loyal staff members, but with labour the single largest cost for many businesses and price inflation inevitably leading to wage inflation, it’s a prospect some may need to reluctantly consider.

Examining both the tasks performed by your employees and how they perform them will help you determine which duties are essential and which can be scaled back or avoided.

Choosing who to let go is never easy. Deciding on a seniority basis can be easiest but not necessarily the best option. Adopting a skills-based criteria might allow you to prioritize retaining staff who have the skills needed to pivot the business in a new direction.

You could also try automating mundane existing tasks using business automation tools, so your staff can spend more time on activities that generate revenue like prospecting leads or making sales calls.

5. Diversify Your Supply Chains

Covid has played havoc with global shipping and supply chains are still affected, something a prolonged period of inflation isn’t likely to help.

Your business may benefit from a supply chain stress test to see how vulnerable you are to future disruptions or savage price hikes, but in the meantime it may be worth establishing tentative relationships with alternate vendors in case they’re needed down the track.

You could also think about stockpiling materials or components you suspect will be especially affected by inflation, or perhaps invest in larger-than-usual quantities of products you know will always be in high demand before wholeale prices go up.