June 3 was Australia’s “will they or won’t they” day. The day each month when the Australian Reserve Bank announces whether they are to raise official interest rates (allegedly to keep inflation in check).
Just one day earlier I happened to catch a compelling report from CNN’s financial analyst, Erin Burnett, on what she described as a “sinister evil” in world economies: inflation.
This spine-tingling report sent me straight to Google to review my understanding of the role global inflation plays in the activities of local and regional service providers.
The research pointed to some startling conclusions. First, the numbers:
Inflation Rates in Key Economies
As inflation nibbles away at the service providers’ margins, often these small business owners are at a distinct disadvantage – especially when conducting business in some of the key world economies:
Economy Inflation Rate YTD
Australia 4.1% (according to the RBA)
Europe 3.6%
United States 4.0%
Russia 14.0%
Thailand 6.0%
Malaysia 10.0%
Now, many of us do business in at least one of these economies, and as competitors in a marketplace, we have to deal with rising inflation on a global scale.
Americans are squealing at $4.00 a gallon gasoline. That’s going to change business activities in the U.S. As such, if you conduct business with an American firm, you have to take into account a 4.0% inflation rate in the States AND an Australian inflation rate of 4.1%. In fact, small service providers are often hit first and hit hardest when inflation – the sinister evil – reveals itself at these high levels.
The Impact of Global Inflation on Small Businesses
Significant, on-going and growing more troublesome each quarter.
Let’s start with the cost of money. The Australian Reserve Bank’s traditional economic wisdom declares that to fight inflation, lenders increase interest rates, making money more expensive to borrow. By slowing economic growth, inflation declines. However, according to my research, it’s not at all unusual for inflation rates to remain high as long as six quarters after an interest rate increase based on production already in the pipeline. That’s what makes inflation “sinister.” It’s always hiding within economic growth – until you begin to smart a little. So, impact #1: slimmer margins on delivered services.
Chances are, to remain competitive in any local market, your company will have to “eat” some of that 4.1% inflation rate we see in our Australian economy. And, if your business works with companies in high-inflation states, Russia, for example, the ability of Russian companies to borrow for growth will be severely limited. In this case, it might be time to examine other markets where local inflation still allows your business to grow more profitable.
Impact #2: Higher operating costs. Assume Australia’s inflation rate remains at 4.1% for the foreseeable future (and 5% is more likely). Your business buying power decreases accordingly. It shouldn’t be too hard to do the math. Look at your figures from last year, deduct 4.1% and you’ll have a general indication of where you’ll be at the end of ’08.
Solutions
Apart from increasing prices (which perpetuates the problem) here are a few cost cutting measures small businesses can consider.
Be your own bank. If the company has reserves, use them to continue business expansion rather than paying interest on inflated currency.
Cut expenses. If you haven’t used it in the past six months, you don’t need it. Cutting operating expenses may require downsizing your staff. Make sure that you maintain marketing staff, especially in inflationary times. The best way to beat inflation is by expanding your client base and for that, you need marketing.
Pay down business debt. If you’re operating at net 30 with interest accruing on day 31, you’re tossing money out the window. Pay your vendors and contractors on time.
Eliminate Variable Rate Credit Cards. Do the research to avoid variable rate company credit cards. Lock into the lowest rate you can and remember – interest rates are negotiable on credit cards. The credit industry is one of the most competitive in the world so American Express or Visa may lock you in at a lower rate simply by asking them to.
Only borrow at fixed rates. This does a couple of things. First, you can calculate your monthly expenses going forward. Second, if inflation continues you’ll pay off that fixed debt with inflated dollars that actually have less buying power. You’re paying back less and less in buying power each year as inflation rises.
Inflation isn’t on the horizon. It’s here, now. If you aren’t feeling the pinch just yet, wait a few months. It’s going to get worse as the demand for money around the world increases, creating increasing levels of inflation.
Take steps today to ensure a solid business foundation for the future.
