How businesses can react to high inflation and rising energy costs

As was the case during the pandemic, the current inflation level poses an existential threat and is bringing back into sharp focus the need for businesses to review their plans.

Most of us go with our gut when something bad happens. Deeply ingrained habits and beliefs can sap our energy and keep us from acting constructively; the first challenge in a time of crisis for an entrepreneur is a mental one. It is necessary to beware the two main emotional traps: Deflation and victimisation.

What are deflation and victimisation?

Deflation is when a traumatic event destabilises us and triggers off intense bursts of negative emotion. We may feel disappointed in ourselves or others, mistreated and dispirited, or even besieged.

The other emotional trap is victimisation. Many of us assume the role of the helpless bystander in the face of an adverse event. 'Those people' have put us in an unfortunate position, we tell ourselves.

To avoid this trap, it's necessary to first reflect on positive factors like, for example, the reasons why our customers are still loyal to us, and why they've been so far prepared to pay for our products and services.

Awareness

In progressing companies, this is often related to the awareness of their culture and core values, and this must remain consistent regardless of any adversity.

Does your purpose run through your organisation like a stick of rock and do your staff buy into it? The 'why’ is what your customers buy. So having a clear understanding of it can help you survive and bounce back well beyond the crisis giving your team motivation and a shared mission to rally around.

In fact, adversity can create opportunities and does not last forever.

Besides values, culture and customers, other factors that require high awareness and focus in times of crisis are our supply chain, our teams and, very importantly, how to protect cash without compromising values, customers, suppliers and the team's capabilities.

Resilience: Proactive or reactive?

It's worth first considering that geopolitical uncertainties, the shortening of supply chains and the ambiguity and complexity of the transition to renewable energy sources, periodical price shocks may be a reality we need to learn to live with them for some time.

Being proactive in 'normal' times is about going the extra mile to protect your team and customers, and gives you a better chance of seizing and retaining the initiative in times of crisis when in competition with other companies.

Businesses that emphasise proactive strategy are usually more effective at dealing with challenges. In simple terms, this means reducing vulnerability and dependence on any potential threat of inflationary pressure.

Budgeting and costing

As an example, a good rule of thumb would be never to have clients or suppliers making more than 15% of your total sales or supplies. Another could be to make sure you have total clarity and transparency on how much money you make (or not) in any product or service you sell. To this, it's necessary to have solid budgeting and activity-based costing.

However, no-one can anticipate every possibility, and no organisation can be proactive in every situation. In all situations, reactive business strategies are those that respond to some unanticipated event only after it occurs. In such a case, it's first paramount to assess the risk you're facing before taking improvised countermeasures.

We are used to managing this in peacetime but, are we able to adapt to the wartime economy and inflationary pressure? If it's about survival, it may not be too difficult to communicate and inspire your team, as survival is a great motivator (as it was for the pandemic).

You may choose to speak to your staff personally (or delegate the task to a trusted manager) and talk to them honestly about their concerns. The same you can do with your clients and your suppliers.

This new picture requires first a reality check so that we can set our sights for the next critical 90-days, but don’t keep it all to yourself. Be honest and seek your team, clients and suppliers' help.

Reality-check questions

Here is a set of reality check questions to help gain clarity on what you're facing.

Supply chain

• How is the current inflation and energy cost situation likely to impact your costs and for how long?

• Will it affect credit terms with your suppliers?

• Are you able to renegotiate and spread payments?

• Do you have a high dependency/concentration on one or a few suppliers (typically more than 15% of your total sales)? How can you mitigate this risk?

• What is it likely to mean in terms of short-term and medium-term availability of supply of goods/services?

• How much stock are you holding? How long will this last? Does it have a shelf life?

• What is your 180-day supply chain new action plan?

Clients and sales

• Can you speak to your customers (at least your top ones) to understand how this crisis is affecting them?

• How will the situation impact your clients in their ability to pay what they may owe you? Can you help them to limit the impact?

• What is it likely to mean in terms of the current pipeline – sales, invoicing, and orders over the next few weeks and months?

• Do you depend or focus on one or a few customers (typically more than 15% of your total sales)? How can you mitigate this risk?

• Do you have bad-debt insurance in place?

• What is your best estimate of how long the impact might last on your top-10 clients?

• Do you thoroughly understand with which products, services and clients you're making a profit and with which ones you're not?

• What's your new 180-day sales objective?

Your people

• How are you going to communicate with your staff to keep them motivated and engaged during a crisis?

• Why do your people work for you, and what best keeps them motivated and loyal in times of crisis?

• What avenues are available to reduce spending to avoid a situation where layoffs are required?

• Are there opportunities to temporarily reduce contract labour and redistribute work to your permanent workforce?

• How would you share with your staff the challenges the business faces?

• How could you get their input and ideas?

• How best could you use their input constructively?

• How could you give them ownership and motivate them to implement ideas to mitigate inflation and energy costs?

• What is your 180-day people engagement plan?

Cash flow

Last but not least, cash flow is the single metric that somehow epitomises your capacity to resist a crisis. Most of the risk assessments of the questions above are the starting point of a 90-day or 180-day plan to protect or increase cash flow to weather the storm.

However, there are some specific cash flow-related questions you can ask:

• Can you measure your energy efficiency? How can you increase it?

• What are your overheads? And where are opportunities to drive efficiencies?

• How much turnover do you need to stay profitable, and which mix of products and services is the best way to get through the crisis?

• Can you shorten your receivables and delay some of your payables?

• Can you liquidate excess stock?

• Can you postpone loans?

• Can you increase your overdraft facilities?

• Can you negotiate more favourable terms?

• What is your new 180-day cash flow objective?

Communicate, communicate, communicate...

In times of crisis, frequent communication is absolutely vital. Frustrated entrepreneurs may not complain for fear of exposing themselves to creditors or suppliers. Staff often may also not complain directly for fear of their job, so you must give them an opportunity for sharing views on a situation.

If a business owner assumes everything is fine until he or she receives a customer or staff complaint, that could be too late.

With this checklist, I’ve hinted at a few operational initiatives, but there are many more ways you can take the initiative and turn events we sometimes feel helpless in the face of into positive outcomes for the future.

For more brilliant business support, connect with Oreste today!