In my previous post, I touched on why a little inflation is desirable, but high inflation almost inevitably leads to a recession, and presents a number of challenges and risks to business, including:
- Rising input / running and borrowing costs
- Declining customer demand due to spending curbs and/or more active price negotiations which reduce profitability
- Morale waning through a combination of slower business and more financial pressures
- Salary increase expectations
With US inflation at levels not seen for 40 years, few CEOs there (or in much of Europe) have lived through this phenomenon before, while Fitch has cut global growth rate forecasts by 0.7%, to 3.5% this year – a significant drop.
In South Africa, of course, we’ve been used to higher inflation rates than experienced in Europe and the US, the “acceptable” range here being between 3% and 6% and while it was just over this in 2014 and 2016 it was only by a few tenths of a percent. The financial crisis gave an uptick to 10% in 2008 and the Rand crisis of 2001 led to another almost 10% rate the following year, but we have to look at the years before 1999 to find a spell where inflation was consistently higher than 6%, and the 20 years between 1973 and 1993 saw it running at over 10% each year, peaking at nearly 19% in 1986.
This means we’re a little more used to inflation, but the higher rates of 10% or more will still catch most by surprise, especially if they’re sustained for some years.
So, how do we counter this and reduce the very real risks to our business?
Leaders who operate on a basis of openness and honesty get the best results, so my 5 Cs approach might help…
Let people understand that inflation is here for the foreseeable future and business conditions can be expected to be tight, but with everyone pulling together the company should continue to be in a strong position and so people should not need to worry about jobs.
Explain that costs will obviously have to be managed more tightly. Start by leading the way with a close look at “executive perks” to see what can be cut, and do so. Then ask your team to look at any areas where they can make savings.
Negotiate your supplier contracts. Get out ahead on this and don’t wait for them to come to you. If necessary, propose extensions based on current terms before they have a chance to raise prices. For example, have you taken account of office space needs and the over-supply since the pandemic to downsize (where appropriate) and agree better terms for the space you keep?
Look, too, at other costs – can you negotiate discounts for early settlement with overseas suppliers? They’re generally more amenable to this as it reduces risk for them and will often offer 2%, or more, per month for early settlement. At the same time, tighten your own credit management to bring in those habitual tardy payers.
Your strategy is not fixed in stone – it should be constantly evolving, especially in difficult times.
Review all elements of your strategy carefully: market, customers, products, product mix and average transaction values, lifetime value of customers, and so on. Where can you make changes that result in better overall results?
Don’t be afraid to change it.
Adopt a zero-based budgeting approach for the business. I’m still surprised at how many businesses adopt an approach where last year’s budget is used as a base and simply increased across the board by a percentage based on anticipated cost increases, rather than looking anew at each area to see whether it can be adjusted more sensibly.
Don’t just push down your budget expectations “from the office of the CEO” but get all layers of management to look at their own areas and work on a zero-based approach. By giving them ownership of the process they couple responsibility with accountability, and a culture of accountability is key for successful businesses.
A stringent approach to budgeting this way can not only yield useful reductions in spend, but can often result in better top line numbers, too. And remember, with changes in strategy come changes in budget…
Of course, many people will be fearful of higher inflation and how they can manage their personal costs. In these cases, staff might find it useful to listen to an expert on personal budgeting to help them, so consider getting one in to equip them with the knowledge and tools.
Look, too, for other ways to help them with this worrying time by raising their skills level – it will pay dividends in terms of engagement and company culture.
Of course, the 5 Cs are not a linear, one-time thing, but an iterative and parallel one, as is so much about leadership.
Done properly, this will result in a sixth C – Competitive Advantage – as few of your competitors will be doing all of this. Managing these aspects will allow you to keep your own cost increases down, below the inflation rate, and so improve profitability and revenue, too.
#BusinessFitness #Business #Accountability #Change #Coaching #CompetitiveAdvantage #Culture #Inflation #Leadership #Management #Planning #Recession #Resilience #Risk #Strategy #Unstoppable
If you’d like to learn more related to this topic, these posts might be useful:
- “Inflation is the parent of unemployment and the unseen robber of those who have saved.” – Margaret Thatcher
- “Control your expenses better than your competition. This is where you can always find the competitive advantage.” – Sam Walton
- CEOs – 6 Important Questions to Ask Yourself Before Next Year
- Is This the Most Important Leadership Skill for Success?
- Leading Your Business Successfully in a VUCA World
- Is Your Business Ready for “The Perfect Storm”?
- 2022 – Looking Ahead – Top Trends Facing Business
- 4 Ways Your Strategy Plans Could Be Derailed
- Reduce Costs by Defining Your Ideal Employee
- Defining Your Ideal Customer Boosts Profits
You can find the annual inflation rate for South Africa since 1960 here.