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Accounting for Inflation


After surviving the pandemic and COVID-related shutdowns, business owners are now facing 40-year inflation highs and rising interest rates.

In October, the Bureau of Labor Statistics (BLS) reported that consumer inflation increased 7.7% year-over-year. While this is an improvement from June’s 9.1% rate increase – the highest in four decades – shelter, gasoline, food and energy all remain more expensive than they were last year.

Moreover, the Federal Reserve announced in November that it would be raising interest rates to a target range of 3.75% to 4%, marking a 3.75% increase in interest rates since March when they were near zero.

Price hikes from every corner of the supply chain have put immense strain on small- and medium-sized businesses. Heading into 2023, as the economy trends towards a recession and inflation and interest rates are expected to remain elevated, it’s important for business owners not to go into panic mode.

Read on for tools and tips that business owners and operators can use to handle inflation and take control of rising costs.

Always know the “why”

It’s critical to always know the “why” behind any business decision. Otherwise, there will be no way to measure its success.

One of the biggest mistakes employers make when trying to fight inflation is simply throwing money at their problems without any rhyme or reason. Inflation puts pressure on companies to increase wages and salaries, but executives should only do so if they have a solid strategy behind the pay raises.

Currently, pay increases are largely failing to keep up with inflation, decreasing the value of workers’ take home pay and wreaking havoc on their budgets. According to BLS, real (inflation-adjusted) average hourly earnings decreased by nearly 3% from October 2021 to October 2022, even as wages and salaries increased.

Business owners should take a look at their employees’ pain points, as well as what competitors are paying to understand how to offer fair compensation. If pay increases cannot feasibly rise to the level of a company’s competitors, then they should explore investing in benefits that their employees find most useful (i.e. student loan repayment assistance, health insurance, flex hours, unlimited PTO, etc.). It’s also important to take a holistic look at a company’s needs, as well as its projected earnings and losses in order to identify which areas money can be moved from to make way for pay raises and/or bonuses.

Use resignations to your advantage

We are currently in the midst of the Great Resignation and are seeing a spike in trends like “quiet quitting.” And the cost of hiring and training a new employee is not cheap. According to research by the Society for Human Resources Management released in April, the average cost per hire is nearly $4,700. Notably, many employers actually estimated the total cost being even higher, ranging between three to four times that employee’s salary after accounting for all hard and soft costs associated with recruiting.

Resignations can cause obvious disturbances, but they can also present an opportunity to reallocate that money into proper salary increases and/or bonuses to the employees they’ve retained. Instead of scrambling to hire someone new, perhaps offering a current employee a promotion and a raise makes more sense.

When budgeting for next year, employers should look at their data and project how many employees may quit. Of these, how many hold key positions? And of these key positions, how many can you lose without needing to immediately rehire?

Make recession plans that work for you

Depending on who you ask, the United States is already in a recession. We’ve had two consecutive quarters of negative gross domestic product (GDP), which meets the general definition for a recession. However, we are also seeing a strong labor market and corporate earnings growth, which is not indicative of a recession.

Regardless of the semantics, business owners should make plans that account for a “true” recession in 2023, especially as the Fed continues to raise interest rates. If a company starts increasing wages without a solid understanding of its current and projected cash flow, they could end up in the red if the economy crashes.

Having a recession strategy allows business owners to know whether they should look for financing now before interest rates increase again. It can also help them decide how much money they’ll have to reinvest in employee retention efforts such as salary increases and benefits programs.

By laying out a plan that accounts for all needs, projected income and expenses, business owners can confidently navigate a recession economy while knowing they have some financial cushion to fall back on.

Struggling to keep up with inflation? Click here to learn more about how NB Business Solutions can help.



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by NB Business Solutions Team

12/06/2022

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