Seeing Inflation

Posted on: July 19th, 2021

There’s no question that we are seeing higher prices for products and services.  But does that mean we are entering a period of inflation?  Many experts are weighing in on the question of what a post-COVID correction is, and what is the new reality.  Are we seeing inflation or just more correction in the economy?

MLA understands business and can help you discern the potential effects of higher prices for products and services.  Gary Wilkins, a strategic principle at MLA, was recently featured on ThinkTech Hawaii, talking about inflation.

This is the second of three articles on the threat of inflation, and how it could impact your business.  Previously we looked at how low-interest rates can contribute to inflation.  In this article, we will look at the high demand for products and services.

Factors Contributing to Inflation

The unprecedented disruption by COVID-19 to both producers and consumers has created wildly fluctuating demand for goods and services:

• The pandemic has affected countries differently, with First World countries able to respond more quickly. As a result, when economies are opening in the West, producers in the East are still under lockdown.
• Transportation bottlenecks, including the blocking of the Suez Canal, have disrupted the flow of products through shipping lanes.

Small to medium-sized businesses are trying to navigate volatile markets, problems with suppliers, and challenges in hiring the people they need.  This can create cash flow problems in multiple places at once.

One simple response to talk of inflation is to raise prices for your products or services.  However, this can be premature and can contribute to other challenges down the road.

Businesses may need to raise prices, both because of the increased costs in labor and materials, but also to not miss out on a general market trend.  But higher prices can mask deeper cost and management issues, and a volatile market will eventually expose these problems.

A better solution is to have early warning systems and control of financial reporting:

• Managing cash requires sound financial processes and reporting. It takes work to ensure that reported results are consistent throughout the organization, presented in a timely way, and highlighting the right information is critical in a changing environment.
• While cash flow is good, many business owners don’t see the importance of investing in these reporting systems. However, trying to build them in a cash crisis is often more costly, and deprives you of the essential information they can provide.

Seeing Inflation in Your Business

Even if your financial systems are good, you still need to identify the key metrics which are your leading indicators.  This creates an early warning system for possible changes in conditions which then allow you to dig further.

Developing new metrics while managing everything else can be an overwhelming thought.  You need someone who can understand your business, and your financial systems to develop the right metrics and help you track them.

MLA can do that.  Contact us to learn more.