Why Inflation Needs to be Factored Into Your Business
What is Inflation?
So what exactly is inflation, and how did we rise to such an astronomical rate so quickly? At the time of writing this article, inflation is at 7.9%, the highest that it has hit in the last 40 years. It is based on the consumer price index, which measures a basket of industries that includes housing, food and beverage, clothing, medicine, recreation, transportation, education, and other miscellaneous “basket of goods.”
Why is inflation so high? Inflation has risen so sharply as of late due to a complicated series of world issues. Two predominant economic theories for rising inflation include cost-push inflation (higher costs raise prices), and demand-pull inflation (demand outpaces available products.
What are you able to do as an executive to keep your company competitive during such uncertain times? The good news is that you don’t need to be an economist. Let’s explore some of the following strategies below:
Real Estate: Asset or Liability?
As mentioned in my previous article, CEO’s should not be forcing employees to return to their offices, especially in a hurried, haphazard manner. So are offices considered an asset or a liability? It depends on what you’re doing with it. If you are merely leasing, the majority of people not coming to the office regularly, and not generating income from it, this may not be as effective as becoming a remote organization.
However, if you are investing in real estate and it is appreciating ahead of inflation, this could be a great deal. Perhaps your business could become an anchor and you could utilize the rest of the office space towards becoming a coworking space or accelerator? While many employees may want to work remotely, others may want to come into the office sometimes or at least have other options to be away from home for better work life separation, as it is easy for many to get distracted at home no matter how disciplined you are.
Also, consider that if you already own real estate, many companies may hesitate to build new office locations given how much building supplies such as lumber and steel have increased as well as supply chain issues. Additionally, interest rates are on a considerable rise, given new Federal Reserve guidance – another deterrent for companies to build or buy a new location. You may be able to offset some of the company’s risks by extending a lease to them versus a costly new building.
Other office related strategies include having a 4 day workweek. This can save on energy efficiency, and also keep workers focused on the days they are working, likely giving rise to less burnout due to having an extended weekend to look forward to. We all need to think lean and mean to stay ahead of the curve.
Perhaps landlords will be amicable to more favorable lease terms, or they run the risk of far too much vacancy. Commercial leases are notoriously long and inflexible – maybe the time has come to rethink this strategy.
Are Your Wages Keeping Up With Inflation?
While having a competitive edge used to be all of the typical office perks such as free meals, unlimited time off, and all sorts of on site services, if you are not keeping up with inflation for your worker’s wages, it is basically like giving your employees a pay decrease. Try your best to keep up with inflation not just based on performance based thinking, but rather as a cost of living pay increase.
Keeping up with an employee’s quality of life should be an expectation, not a perk or an afterthought. You should do this pay increase whether you can pass costs to your customers or not. Still, many customers understand that costs are going up, so rate increases for your products or services should not be that surprising. Will this hurt your bottom line?
Perhaps a bit, but how much more so than a revolving door of quality employees? As we have learned, it’s important to do the right thing- even when it may look like it could hurt somewhat in the short term to ensure our long term success.
While it appears that we may be in for a rough road ahead, it is all the more important to account for volatility when it comes to accounting for inflation. Stay ahead of the game and keep this in mind for all of your cost centers.
Authored by Brian Wallace.
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