Business owners are the canaries in the economic coalmine: when the business environment shifts, they’re the first to feel it.

So the news that inflation has picked up has likely come as no surprise to you. According to Statistics Canada, consumer prices jumped 3.4% in April from a year ago, up from a 2.2% year-over-year rise in March. And prices surged 4.2% year-over-year in April in the US.

The statisticians are, of course, playing catch-up to what’s happening on the ground. Anyone who’s bought lumber, gas or groceries lately knows that prices are trending up at a faster clip.

We also know that once inflation starts, it can create a sort of feedback loop: higher living costs prompt employees to ask for raises. More money in workers’ pockets means more spending, triggering more inflation, which then pressures the Bank of Canada to raise interest rates. Higher rates lift the Canadian dollar, which lowers the value of your company’s overseas sales. And on the cycle goes.

Here are six strategies to help you manage inflation. And if the pace of price increases slows—and some economists do feel this bout of inflation will be brief as supply chains catch up following COVID-related shutdowns—these strategies will help grow your bottom line.

1. Start with some cash-flow scenarios

“The first thing we advise clients to do is run a cash-flow scenario so they know precisely how rising costs will affect their bottom line,” says Scott Allman, AVP, BlueShore Financial Business Group.

A good basis for your forecast is the 3.4% inflation rate we mentioned earlier. You could then build from there—perhaps with another scenario at 4% inflation and one at 4.5%. Once you’ve done the modelling, your options come down to whether you’ll pass on any cost increases to customers and/or how you’ll cut your business’ costs to compensate.

2. Your inventory: Bulk up your orders—and think local

When inflation and interest rates rise, eliminating high-interest debt, such as that carried on a credit card, should be your first move. But you should also start a conversation with your suppliers to see if there are ways you can blunt the impact of any rise in costs.

Is it possible, for example, to do bulk ordering? If so, perhaps you could maximize your savings further by putting together joint orders with other local businesses.

Allman also suggests, where possible, shifting to suppliers closer to home. Doing so could mean big savings on shipping costs: according to Statistics Canada, average gasoline prices jumped 63% in April 2021 from their depressed levels in April 2020, when the pandemic hit full-force. Even setting that comparison aside, April 2021’s gas prices were up 14% from February 2020, the last full month before the pandemic hit.

3. Your merchandising: Add items with fewer bells and whistles

If you do need to pass costs on to customers, consider introducing lower-priced products or services with fewer features. This way, if you’re forced to raise the price for your regular goods or services, you still have a chance to hang on to price-conscious clients who may have otherwise walked away.

To see this strategy in action, consider one of the most successful products of all time: the Apple iPhone. Facing competition from cheaper Android phones, Apple (whose top-end model today sells for around C$1,400 without a data plan) introduced a budget version in April 2020: the iPhone SE, which today sells for around C$599.

It was a hit: during the pandemic-stricken second quarter of 2020, Apple was the only smartphone seller to increase its sales volumes. Just over a quarter of iPhones sold were the SE model.

4. Your employees: Lean into the work-from-home trend

With consumer prices rising, it’s only a matter of time before some employees knock on your office door—or more likely send you a Zoom meeting request—to ask for a raise.

The cost-cutting tips we’ve covered so far will help you offset rising labour costs. But there may be other options you could use, too. You could, for example, offer more opportunities for employees to work from home (or continue doing so) post-pandemic. For some, this could amount to an indirect pay raise, as they’ll reduce child-care and commuting costs.

An added benefit: you’ll need less office space, which may allow you to reduce your physical presence and negotiate better terms the next time your lease comes up for renewal. And with many cities’ office-vacancy rates increasing (Vancouver’s jumped to 6.7% as of the end of the first quarter from 3.1% a year ago), you may have a lot of leverage in doing so. 

The remote-work shift can work to your advantage if you’re looking for new personnel: if your business model allows, consider hiring someone living in a lower-cost area than where you’re based. For example, if your business is in Vancouver or Whistler, look to hire someone from outlying areas where costs are cheaper. This could potentially let you pay less for similar talent than what you’d attract at home.

5. The loonie: Use a strengthening buck to retool

If you export to the U.S., you likely watch the loonie’s movements closely—and you’ll have noticed that the dollar has surged against its U.S .counterpart. Six months ago, $1 USD was worth about $1.30 CAD; a greenback now translates to $1.21 Canadian (as of May 27).

In other words, if you’re billing American clients in U.S. dollars, the value of your sales fell about 7% over the past six months when translated to Canadian currency.

There are signs the loonie could strengthen further, partly due to the divergence between the U.S. Federal Reserve and the Bank of Canada on interest rates: the Canadian central bank expects to start hiking rates in 2022, while the Fed doesn’t plan to do so until 2024. So as long as this gap exists, the loonie will find support.

How should this fit into your strategy? Use the stronger loonie to upgrade equipment purchased in the U.S. Now may be a particularly good time to do so if you’ve put off making these upgrades during the last year of pandemic-related restrictions.

6. Your portfolio: stick with stocks—and consider commodities

What about your personal portfolio? The good news here is that if you own stocks, you should keep doing so, as stocks tend to rise in a rising-growth, rising-inflation scenario like the one we’re likely to see in the coming months. And history suggests that adding some exposure to commodities, such as gold (which has long been seen as an inflation hedge) could be a good idea.

We don’t have a period of sharply rising inflation in the recent past to look to for comparison, but the last string string of Bank of Canada interest-rate hikes does give us some context. It ran from September 8, 2004, to July 10, 2007, a period when the central bank more than doubled its overnight lending rate, from 2% to 4.25%. Stocks, for their part, performed well, with the Toronto Stock Exchange gaining about 69% in that time. Gold jumped from around $565 an ounce to around $846.

Your advisor can help you build an inflation action plan

So where does all this leave us? At the end of the day, rising inflation and interest rates will likely be challenges for every business in the months ahead, but there’s also growth in the forecast as the economy reopens. The strategies above are a great start for navigating this new environment, and your BlueShore business advisor can build on them, helping you devise a plan that fits your company’s unique needs.

BlueShore Financial, Business Advisor, Herta Lemare

Herta LeMare

Business Advisor

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The information contained in this article/video was written by BlueShore Financial or one of our expert financial writers and was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. It is provided as a general source of information and should not be considered personal financial advice.