Change is one of the fundamentals of the world’s economy and a business owner should know how to keep up with it.
While most are familiar with the two of its prominent aspects, which are inflation and recession, there is more to it. And among those stagflation is one of the biggest concerns for economists.
It is significantly rare and due to its static nature established businesses do not get affected by it. Although budding companies on the other hand might face difficulties while navigating stagflation.
This blog will help you completely understand this economic condition and how you can sustain your business should it happen.
What does Stagflation Mean?
According to economists, when the economy gets stagnant or in recession for a long time with probable inflation rise is called Economic Stagflation. It occurs due to high inflation in the economy and rising unemployment issues.
The name “Stagflation” was first coined in the 1970s to refer to a situation with both high inflation and unemployment rates.
During this period of time, the demand for commodities is not that strong. It has a strong effect on the globe’s central banks, including the US Federal Reserve.
While the Fed usually boosts economic activities by cutting internet rates, such measures would only negatively and theoretically increase inflation even higher during this time. This results in even loss of clients, who then resort to affordable yet in saying.
How Can Stagflation Affect a Business?
This is notorious for leaving companies in a crunch, but the situation gets even worse for small businesses. Under usual circumstances, a company would increase its prices, remaining confident and competitive. Instead, businesses remain calm as their competitors are also going through similar issues.
The increase in cost makes everything extremely unaffordable. As a result, more people would lose their jobs, and the ones the company kept would not receive a proper hike.
Some employees would resign to find better-paying jobs that would help them cope with the drastic hike in prices. This creates a vicious cycle of a lack of employees and a low number of consumers.
Now that its fundamentals are cleared let’s understand how your business will be navigating stagflation.
Tips to Navigate Stagflation
One cannot stand still during such unprecedented times and expect to have no negative repercussions. Especially if you are a small business, you must take calculated actions during stagflation, so your company does not sustain much loss.
So, if you were wondering about “how to navigate stagflation”, the following tips are some great ways to tackle the situation.
- Cut Costs in Your Businesses
Since prices rise during such economic conditions, you should try to cut down on costs as much as possible. This way, your overall expenditure would not get affected. As yourself and your team questions like:
- Can you get discounts by purchasing in bulk?
- Are there ways to reduce the logistics costs?
- How much energy can you cut down without affecting productivity?
These are just some instances of many cost-cutting solutions you can come across depending on your business. However, ensure that you are taking well-thought decisions and not randomly reducing funds allocated for different aspects of your company.
- Boost Quality
It is common for companies to increase the price of their services and products during economic stagflation and inflation. But if you are simply going to ask for more without giving anything extra, your clients will leave.
Hence, it would help if you also focused on improving the quality of your assistance and goods to make them worthy of the price you charge. Understand, here, making your consumers believe that you are bringing something new and improved is more critical.
So, to make this tactic effective, you need to have a strong marketing plan as well.
- Use Investing Strategies
Other than reducing costs and asking for more from your consumers, you can also utilise the stagflation itself. Invest into channels that perform great during such economic conditions and try to gain funds to pay the rising prices of your bills.
Some investing strategies that can help you during this time are:
- Sticking to value and cyclical stocks
- Applying the ‘barbell’ strategy
- Avoiding growth stocks
- Try to go for ‘price setters’
Surviving stagflation will become easier if you engage yourself in these the moment you realise the market has stagnated.
- Becoming a Landlord
While your business revenue would drop, stagflation tends to increase rent prices. Hence, if you own certain properties, this is time to leverage them by renting them out. And if you already did not, consider purchasing properties which might even include the building your company operates in.
The positive side of following through with this tip is that you can keep renting your properties even after the economic conditions have stabilised. This way, you will have a constant flow of funds to utilise and expand your business, making it ready for navigating stagflation in future.
- Improve Productivity
Another way to tackle stagflation is to improve your company’s productivity without significantly increasing your business expenses. For example, try to automate your work procedure, purchase required machinery and find ways to produce more in less time.
- Make Most of Currency Deprecation
Just like inflation, stagflation too affects the domestic currency negatively.
If you mostly sell products, a drop in currency value would increase sales as this would be like a discount to your customers. However, if you purchase them internationally, a lot of instances can happen depending on how your vendors charge you.
A great way to navigate this situation is to get support from foreign exchange specialists. Multiple online alternatives, such as The Currency Club, are available in the market. These institutions offer solutions for foreign exchange risk management, international payments, etc., keeping your business prepared for all sorts of economic crises.
- Tightening Account Receivable and Payable
During such circumstances, you would want to get money quicker while spending it at a slower pace. Therefore, you would have to reduce your late account receivables and ask the vendors if you have the longest possible term to make payments. This will improve your cash flow, giving you more stability during such dire times.
- Keep an Emergency Fund
Although economic changes can be calculated, just like the weather, no one is sure exactly when they will occur. Hence, it is always wise to prepare for the worse when you are in a stable situation.
An Emergency Expenses fund would not just help you in navigating stagflation; you can use it for multiple other instances as well.
But how much should you have in your emergency expenses?
Professionals believe you should have enough to sustain your business for six months at a stretch. Also, revise the fund you have there every year after creating a rough budget for your company.
Just because stagflation hardly seemed to have occurred in the past few decades does not rule out its chances of happening. With the world economy shifting, it is possible that some countries experience it firsthand.
Instead of depending on last-minute resorts to overcome that situation, use this blog as your guide. It will make navigating stagflation a more straightforward endeavour and help you stay prepared for the worst.
Originally posted 2022-08-26 22:49:46.