Inflation can feel like a bull in a china shop, destroying budgets and causing chaos across the supply chain. But it doesn’t have to spell disaster for your farm or food business.
With the right strategies and good business management, you can prepare for inflation as best as possible then weather the storm when it’s here.
Here are our top strategies for managing the impacts of inflation on your farm or food business.
Increase Your Prices
Increasing prices is a natural and acceptable response to inflation. When considering raising your prices, make sure that the new prices will work for your business and that they fit into the market.
It’s easiest to increase prices when doing so is a regular part of your business model. If your customers are used to price increases, they won’t be shocked when you do so because of inflation and they’ll remain loyal.
Increasing prices requires a strong marketing plan. You need to be able to communicate the value of your product to your customers. A successful marketing campaign for a price increase will explain why the price is higher and why the customers should continue to purchase your product.
Increasing prices can feel daunting, but it’s a necessary element of weathering inflation.
Build Inflation into Your Budget
When inflation is high, you’ll feel the pinch in your operational costs and costs of goods sold (COGS) such as fuel, merchant fees, raw ingredients, and repairs and maintenance. The fixed expenses for your business aren’t likely to increase rapidly, but the costs associated with sales will.
Operational costs and COGS should be in your budget as a percentage of sales. That way, as you budget for increased sales you are also budgeting for increased costs.
However, during this moment of high inflation and instability, the normal increases along with sales may not account for the total increase in costs.
So, add some padding to your budget. Let the costs naturally increase according to your ratio of sales, then add on an extra percentage of the final increased number to account for those inflation related increases. We used 11% as a number in some of the budgets that we made in 2021.
For example, let’s say repairs and maintenance are 4% of the sales. You find that the total expected cost for repairs and maintenance will be $1000. Take roughly 11% of 1000, about $100, and add that padding to your budget.
Adding this padding doesn’t guarantee that you’ve correctly predicted the extra increase in costs. But, it does allow you to see what will happen to your budget if there are extra costs. Then, you can decide if you need to make a different choice around scale or decrease other parts of the budget to control your overall profits.
Your budget isn’t going to be perfect. No budget is. But, if you acknowledge inflation during the budgeting process you are less likely to end up in a precarious situation because of it.
Manage Your Farm or Food Business Well to Begin With
Inflation hurts less when you’re already operating a lean business with a dialed-in labor force. The general principles of good management are extra important in moments of economic stress.
If you notice inflation is pinching your business, it’s a good time to do a SWOT analysis and identify inefficiencies. Maybe you don’t need to buy something in bulk or have so much stock on hand. Getting the business more lean overall will free up space in the budget for those extra costs of inflation.
Likewise, don’t let the stress of inflation distract you from the importance of being a good manager and valuing your people. Keeping labor costs steady is critical to staying on budget as best as possible.
Ultimately, if you’re running a good business, it’s going to be easier to deal with inflation.
Inflation is scary, but it’s not an insurmountable road block. With strategic price increases, strong marketing, a budget that leaves room for the unexpected, and good business management overall, you’ll get through it.