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Protecting Profits from Inflation

Posted: 04 Aug, 2021

This month, the threat of rising inflation has been a hot topic. The governor of the Bank of England Andrew Bailey had been insistent that it is under control but before he departed his own chief economist Andy Haldane warned that inflation was rising fast and could reach 4% this year – double the Bank’s target and above the 3% the Bank said they expected it to peak at.

And there is no doubt that costs have increased. Many key commodities are in short supply due to transport and supply issues and with the staffing shortages many industries are suffering, businesses are having to pay more than they did before to buy stock, attract and retain staff.

In his speech at Mansion House on 1st July, Andrew Bailey insisted that inflation will be temporary. “Where the recovery in demand outstrips supply, it is entirely possible that we will witness temporary periods of excess demand, or what more commonly we might describe as “bottlenecks”. This is especially likely within particular sectors, given the uneven nature of the recovery,” he said.

But on 14th July, Sir David Ramsden, deputy governor for banking and markets at the BoE said that a sharp uptick in inflation showed the bank had underestimated the strength in rebound prices and that monetary policy may have to be tightened earlier than planned.
 

Preparing for inflation

With many businesses feeling the effects of inflation, companies across the economy have been increasing their prices, passing on the rising costs of staff wages, raw materials and transport to their customers.

But while inflation is still relatively low and the bank of England hopes the economy will ride-out what it sees as temporary ‘bottlenecks’, there are some things businesses can do to manage turbulence and protect profits from temporary price increases.

 

1 Forecast

The first, is to forecast what might happen. Inflation has a clear impact on pricing and revenue, affecting demand and the ability to accurately price within the market. While at its simplest it is just a matter of supply and demand, inflation can be a maze that businesses find difficult to navigate. Many businesses will struggle to accurately price products against fluctuating demand and prices.

But by forecasting, businesses can try to predict when they might be hit by higher demand and when products might be in short supply. With this information, businesses can plan accordingly and take actions such as such as ordering stock ahead of competitors to avoid getting caught up in demand ‘bottlenecks’.

 

2 Digitalise

While forecasting can be done manually, with the technology available today it is an unnecessary drain on time and is likely to be less accurate that utilising an AI-based solution.

Utilising such a solution can help businesses to more accurately predict consumer demand and supply challenges and automate and support pricing decisions.

Technology can also be used to help bring down costs. In the hospitality sector, many restaurants and bars are adopting payment apps that allows diners to scan a QR code, split the bill and tip staff, all without having to flag a staff member for attention. With the current staffing pressures that many hospitality businesses are facing, these apps allow every staff member’s time to go further, thereby reducing staff costs for the business.

 

3 Negotiate

Negotiating with suppliers to lock-in pricing for the next quarter or next year could also help to smooth out fluctuations and might have the positive effect of meaning that prices will drop in real terms as inflation increases. It is however important to be careful not to sacrifice quality as businesses look to negotiate favourable contracts.

By forecasting, adjusting prices accordingly, and negotiating the best prices for stock, businesses can keep tight control over costs as inflation rises and dips. This ability to adapt is essential to stay competitive, retain healthy margins and ride out the ‘bottlenecks’ until stability returns.

 

TMA UK is part of TMA, a global organisation that represents the interests of turnaround professionals as its members who have the skills needed to assist in these unprecedented times. If you need assistance, please contact our helpline on 0844 804 0116


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