Everything you need to know about deflation and your small business. Deflation. The big "D" word is creeping into the vocabulary of economists and market watchers. Small business owners have never experienced a deflationary period unless they are of the retirement age. Most business people are unfamiliar with the "D" word. In times of uncertainty, be aware of possible economic outcomes and how they impact your business.
Inflation: For decades people have come to fear inflation. Inflation is a period of rising prices caused by excess money supply. Inflation hurts shoppers buying goods and services, such as food or gasoline, however, inflation can benefit sellers, as anyone who has watched their real estate value increase knows.
Deflation: Deflation is the opposite of inflation. Deflation is characterized by a period of declining prices. Great news for holiday shoppers, as computer prices and clothing drops but bad news for business profits in price dropping sectors. Is the U.S. heading for deflation?
Most economists and the Feds are neither mentioning nor watching deflation. Several well-known critics are joining the deflation camp. James Kramer of The Street & Donald Luskin of Trend Macrolytics LLC believe the threat of deflation is upon the American economy. CIBC World Market's chief economist, Jeff Rubin, stated that "While the Fed is refusing to publicly recognize it and most economists are still skeptical of its existence, "Big D" is back, and this time deflation is no longer solely in the domain of asset prices". If it is true we are in deflationary times, what can a small business do?
Six Ways to Prepare Small Business for Deflation
1. Scenario Planning: Develop an action plan based on the scenario of deflation hitting your industry. Deflation may not cut across all sectors. Gas prices can increase while technology falls. Play out scenarios of falling price points in related industries and look at both threats and opportunities for your business. How will your company adapt?
2. Inventory Reductions: Operate your business on the Just-In-Time (JIT) inventory model. Order smaller amounts in shorter cycles to take advantage of dropping prices and optimizing profits.
3. Avoid Commodities: Either get out of products or services that are commodity based or drastically cut costs. Reposition your business as a niche marketer of high value goods.
4. Increase Productivity: Not all deflation is negative and wealth destroying. Deflation can benefit small business by making technology affordable. Deflation can be a great opportunity to purchase technologies hit with declining prices. Buy technology that can boost the productivity of your company.
5. Cut Costs: Review the bottom line. Deflation will hurt profits and wages. Take a microscope to the costs of operating your business and eliminate the "nice to have" goods and services.
6. Review Contracts: If you are signing a long-term contract, consider the impact of deflation. Holding a long-term contract during a period of dropping prices locks you into a high price point. On the contrary, negotiate longer contracts with clients if at all possible to hold your margins and profits.
It's time for small business to cast a gaze toward deflation. Times may be tough, but opportunity can be just around the corner. Learn to accept the challenges of today and prepare for tomorrow.
