Inflation: Your Silent Enemy

Inflation is the rising price of goods. I call it “your silent enemy” because it is not easy to keep track of in your business and it’s not easy to reflect in your financial statements but it’s a reality you face every day when you buy goods and services to run your business.

Simply put, things cost more today than they did yesterday and they cost more yesterday than they did the day before.  That’s inflation. If you don’t occasionally consider the impact of inflation on your business, you’ll watch your profitability erode without even realizing it.

Here’s a simple example:

Let’s say you bought something in 1999 for $100. Ten years later, that same item would cost you $127.55. On average, inflation pushes prices up by 3% per year. So, if you’ve locked your prices and haven’t changed them in a couple of years, you’ve eroded your profit margin by 3% annually.

So what does this mean for you?

• First, be aware that inflation is rarely reflected in your financial statements: Book value of assets is rarely the real value (market value plus inflation). There’s not much anyone can do about this; I’m just telling you this as an FYI.

• Second, if you want to maintain the same margin of profitability from one year to the next, your prices need to rise by an average of 3% each year (assuming that everything else in your business stays the same).

• Third, understand that your vendors and partners are facing the same situation and you should expect their prices to rise by 3% every year for the same reason you need to increase your prices by that amount.

• Fourth, if you are holding on to cash in the bank (perhaps you’re saving up for something or you just want to have a cushion for difficult times), split it up and put some of it away into a higher interest savings account or certificate of deposit. Banks rarely pay interest anymore so you are losing 3% of your money each year simply because it’s not increasing while everything else is. Consider keeping a smaller emergency reserve on hand but putting the rest into something that attracts some interest well above 3%.

If you’re not careful, inflation will seriously hurt your business by eroding margins. Schedule time at least once a year to revisit your prices and make inflationary adjustments. Or, better yet, make 1% price increases 3 times a year, which will seem fairly painless to clients but will help to protect you from your silent enemy.