How To Prepare for Inflation
By: Ruth King
First, you MUST have profitability. Not profits. Not losses. Profitability.
What’s the difference? You can have profits one month and losses the next month. Or, profits one year and losses the next year. You want to avoid swings between profits and losses. Profitability is continuous profits year after year.
Profitability gives you the ability to generate the cash you need to survive and grow. Profitability gives you the ability to experience freedom to do the things you want.
This means you must price profitably – make sure you are deciding what net profit per hour you want to earn (it may be lower in recessionary times), add your overhead cost per hour, and then add your direct costs. This is price to the customer. Make sure you provide value to justify the price.
Here are three other actions to take:
- You MUST save cash.
You need at least three months of operating cash in a savings account at all times. Customers are likely to pay late now. Be firm and be the squeaky wheel. They know you are paying attention and you will potentially come first.
How do you save three months of operating cash? Save a minimum of 1% of every dollar that comes in the door (and to rebuild your savings I suggest 2%).
What if you don’t have the profitability to save cash? This means that your net profit per hour is negative or less than you could earn working at a fast food restaurant. First, increase your net profit per hour to at least minimum wage (and more if you can do it).
Once you determine the revenues you need for your minimum net profit per hour, increase revenues by an additional 2%. And, save the additional 2%.
- No more than 20% of your revenues from one customer or one industry.
One of my clients had 80% of his revenues from the restaurant industry. Then the pandemic hit. No revenues. What did he do? He found companies who were still operating and got customers in those industries. This saved his company.
The same might be true if more than 20% of your revenues come from one customer. Suppose that customer goes bankrupt? Suppose one of your employees really screwed up and you lost that customer? Spread your customer base around many, many customers.
- Have a recurring revenue program.
With recurring revenue programs you have loyal customers and predictive cash flow. It’s been my experience that 90% to 95% stay in recessionary times.
Doing these activities will help you prepare for inflationary times.
Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.
