Folks like me have lived through this before. And , since I am a business advisor, I feel compelled to share some insights with you.

Back when we were starting our company, rampant inflation was on the horizon.  And, figuring out how to cope with the ever changing costs and environments were challenging.

I mean, think about it.  If we wanted to obtain a new client’s business, we had to come up with a fee they’d be willing to pay.  But, since most of our projects took a year or two to complete, we’d have to guess what our costs were going to be- even though those costs could double in short order.  Did we price the projects at a loss?  Did we price them a little higher to ensure we’d have funds left over- or would that mean our costs would scare away the client?

(To be honest, this is where a lot of those cost-plus contracts came into play.  Where one would be able to pass on higher costs to the client/customer as conditions changed.)

Think some more about it.  Let’s say you are a contractor, hoping to redo a client’s kitchen or first floor.  Do you shell out thousands of bucks for the raw materials (assuming you have enough cash to do so now), find a place to store that inventory, which assures you have a firm handle on your costs, so your project should be done at a profit.  (OK, that does assume that labor costs are going to be under control for the duration of the project.)

To be honest, most small business folks lack the deep pockets to buy all those raw materials now.  And, even so, there’s also a  cost inherent in those advance purchases.

When we were making our medical products, we had to worry about the price of bottles, raw chemicals, fuel- in short everything.  And, we balanced those costs with our ability to shell out cash to buy them ‘now’.  (Or, what the costs for our credit card bills would be, should we use them to obtain the materials.)

What we didn’t have to factor in back then is that when we placed an order for materials or items, that they would show up on time.  (That is, as along as we paid our bills in a timely fashion.)   Nowadays, supply chain backups mean we aren’t really sure that placing an order for 2000 board feet of cedar is going to arrive in 10 days- or 10 weeks.

We also weren’t big enough to do what many a large firm did.  Which was screw it’s smaller suppliers, paying their bills in 90 days, despite promising to adhere to the 20 day payment terms.  (We actually fired many a client/customer who employed that practice.  It’s something every business has to do during inflationary periods- fire client/customers who don’t promptly pay their bills.  Because one’s survival is at stake.)

We also began factoring our invoices.  Because that let us get cash for our delivered items in 5 days- not the 20 to 60 days with which our clients would pay the bill.  But, the interest rates were outrageous.  (Yes, we priced those fees into our costs.)  We were paying prime plus 8 for the luxury of factoring our invoices.

And, once our clients paid the bill, the interest fees dropped.  So we still had to watch how they paid their bills, because a late payer meant the overall costs for interest would be outrageous.

We sought out ways to minimize our fuel costs.  We scheduled deliveries to cities that had deep traffic jams for the dawn’s early light, if we could.  So, our trucks wouldn’t get caught idling- and we didn’t have to pay our truck drivers for hours of stall time.

But, since we were dealing with hospitals, that wasn’t always possible.  But, delivering to a clinic was easier- because we had our drivers literally bring the materials to their storage facilities, arrange the inventory, and then leave.  Since we were saving the clinic’s labor, they let us deliver at more reasonable hours from our point of view.

We’ll have a few more posts on dealing with inflation over the next weeks.  Not that we have all the answers (even though it may often sound that we do), but our discussion should help you consider questions that affect your business.