Global inflation is expected to call the shots in 2022 – here’s how to get ready for it.

With the global economic recovery gathering steam and ongoing supply chain disruptions, inflation is on the rise worldwide and central banks across the globe are looking to hike their interest rates over the year to come. Agile small and medium businesses will need to rethink their strategies and tactics to cater for a change in the economic atmosphere.

Over the past two years, South African businesses saw muted inflation and the repo rate at historic lows. But with oil prices soaring and the South African Reserve Bank in an interest rate tightening cycle, the picture has changed. While headline inflation is projected at 4.8% in 2022, prices of many key goods and services are rising at a far quicker pace.

Here are some approaches companies can take to weather the changing economic climate:

1. Prepare what-if scenarios 

Run some financial forecasts to test how potential inflationary forces will affect your business. For instance, you could consider what the top and bottom-line impact would be if:

  • The petrol price goes up another 10%.
  • The value of the rand versus the dollar depreciates 10-15%.
  • Interest rates climb 0.75 percentage points over the year.
  • Raw material prices go up 25%.

This will help you determine how well prepared your business would be for downside scenarios and which evasive actions to take.

An example of a what-if scenario within Tarsus On Demand would be when the service that we are selling becomes a commodity. All players within the market then square off in a price war, particularly with the general upward inflationary trend globally. How would this race to the bottom of profitability impact a company’s ability to remain both competitive and increasing margins? So the question is, does TOD have a sticky service offering that can compensate for a potential commoditised service?

2. Pay off interest-bearing debt 

Many businesses needed to borrow to keep afloat in the worst months of the pandemic. Now is an ideal time to prioritise the repayment of overdrafts, credit cards and other high interest-bearing short-term debt.  Pushing any excess cash into the overdraft facility will decrease interest and assist with the working capital of the company.

3. Be thoughtful about how you use your cash

Businesses with cash at hand should be strategic about how they put it to work. Even with interest rates rising, cash in the bank will not grow at the same rate as inflation. Now could be a good time to stock up on materials or invest in productive assets such as vehicles, technology or machinery before prices rise. Focus on investing in areas of the business or projects that can be optimised or automated through technology. This can assist with huge savings in the medium to long term.

4. Lock in supplier and service provider pricing

Depending on the nature of your business, you may need to brace for suppliers and service providers to hike their prices. Rather than wait for that to happen, take the initiative. Review your relationships and contracts, and approach quality vendors and service providers to set long-term agreements with fixed pricing.

5. Prepare your pricing strategy

With your input costs rising, you’ll need to recover the increases from your customers. Not every business has the pricing power to impose across-the-board price increases. During these difficult times, business leaders may need to be strategic and targeted about how and where they increase fees and prices. You can use tactics such as shrinkflation (offering slightly less for the same price) or product bundling to improve your margins.

Its also not always about increasing prices across the board but looking at a customised approach within the business. For example, look at the customers that make up 80% of your revenue, engage with them to understand their challenges and adopt solutions accordingly that meet their needs.

Be ready for anything

With crises in Europe and oil prices above $100, the world is braced for high inflation. But the big lesson of the past two years is that things can change quickly if, for example, a deadly new COVID variant emerges. Wise business leaders will thus constantly take the pulse of their business and plan for a range of different scenarios.