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The Only Thing Not Inflated is Revenue

In our capitalistic economy, nothing gets executives going like the thrill of outmaneuvering competitors and leading one’s industry. What propels one company to outperform peers can come down to an effective evaluation of the organization’s environment. This includes seeking out opportunities that rivals have not while preparing for threats they have yet to identify. What happens, however, when an entire global economy falls mercy to a common foe? That adversary today is an inflation rate that has surpassed 9%.

High inflation poses a threat to both sides of an organization’s ledger. Consumers have less money to spend – leading to decreased business revenue – while organizations have greater expenses. This dual threat has negatively impacted three-quarters of small businesses, according to a Goldman Sachs survey.2 Until recently, consumers were stuck at home during the pandemic and liberally spending on goods and services, but things are changing now. "People are cutting back across the board. They're driving less, they're spending proportionately less at the grocery store. And they're getting rid of subscriptions they don't need," says Yahya Mokhtarzada, chief revenue officer of Truebill.3 In fact, U.S. consumer spending fell 0.4% in May for the first time this year.

Another challenge for organizations is the increased cost of doing business. A survey by the National Federation of Independent Business (NFIB) found that 79% of small businesses have been impacted by rising fuel prices, while 72% point to the cost of inventory, supplies, and materials as a contributor to higher business expenses. Moreover, almost a third of businesses reported that the labor cost is also affecting their bottom line.

How can this be avoided in the future? 

Today’s inflation-related woes may seem inescapable, but the next generation of leaders should learn how to mitigate such challenges in the future. According to Deloitte, leaders should consider the following:6  

  • Monitor. Develop internal capabilities that can assist companies in monitoring for future economic calamities. This includes scenario planning and effective forecasting. 

  • Make smart hedges. Businesses can decide what to stock up on, such as raw materials, and identify markets that can quickly destabilize during a turbulent economy. 

  • Be proactive. Smart leaders proactively focus on riding out uncertainty. This includes building a diversified supply chain with slack. 

Finally, David Jagielski of The Motley Fool suggests that businesses strive for higher margins in order to combat bouts of inflation. One way to do this is through subscriptions. Software giant Adobe, for example, has a subscription-based digital system that has been quite resilient since people all over the world need its platform to conduct business. The company’s gross profits are 88% of its revenue, a key reason why its net income has gone up 2.8% year-over-year, even during high inflation.

Overall, organizations need to keep a close eye on their environment. Threats aren’t always in the form of competitors, and savvy business leaders who understand this will be able to maneuver around inflation-related turbulence.  

About the Author

Patrick Soleymani is the associate dean for outreach and strategic engagement and an associate professor within the management area in the School of Business at George Mason University. In his instructional role, Soleymani is an award-winning professor in the fields of Organizational Behavior, Principles of Management, and Entrepreneurship. He received his Bachelor of Science in Management and Master of Business Administration from George Mason University before receiving a Juris Doctor from the University of Baltimore. He is also a member of the Maryland State Bar.

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