Business Topics

Steps You Can Take to Combat Inflation

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MCN Editor Dan Markham For the first time in decades, the United States is in the midst of a serious inflationary environment. For operators in the manufacturing sector, the consumer is just now catching up to the business world.

The significant run-up in inputs was a dominant storyline in 2021, though one that included tremendous hikes in the price of steel to offset much of those costs. Now, the manufacturing sector is still looking at some year-over-year cost increases while experiencing a deflationary climate for steel pricing. It’s a condition that tests the business operator. 

But service centers, fabricators and others in the metals space can navigate through these challenging, though hardly unprecedented, times. Experienced operators have seen inflation, downturns and labor disruptions in the past. “These times are no different,” said Gene Marks, an author and small business expert who delivered an address at the 2022 Steel Market Update Steel Summit in August. 

Marks said the key for any successful enterprise is continuously focusing its attention on the days ahead. “One thing among thousands of business owners and leaders that separate themselves do when it comes to building a sustainable business is they’re always looking ahead.”

Looking ahead can be a bit terrifying at the moment, given the unusual conditions. But there are a number of tactics the average operator can do to manage. Marks offered a host of options tailor-made for the current climate.

Revisit pricing. Take advantage of the accounting and ERP systems you have to understand where you can adjust your pricing. “Focus on specific customers, specific products and specific product margins. Look at data and find specifically where you can get away with it and avoid customers and product lines where you can’t.”

Communicate. His best clients are communicating with their customers about everything that’s happening. 

Forecast regularly. “Don’t give me the excuse forecasting is hard. I’m not asking you to guess what the price of raw steel will be a year from now. I’m asking you to forecast 90 days out.” He notes that operators know their rent, payroll and many other costs. The trick is forecasting sales. But companies that have been in business for a while have prior-year sales to look at, sales teams to talk to, and an existing order book and open quotes. “If you discipline yourself to forecast every month, that’s rolling forward 90 to 120 days, you’ll be in a better position to navigate this inflationary environment.”

Practice shrinkflation. Consumer product makers have been dealing with inflation by reducing the size of an item but selling it for the same price. “Look at the product you’re selling or the service you’re offering. Can you offer a little less for the same price?” he asked.

Successful companies can also counter inflation on the financial side by locking in long-term agreements where possible, taking advantage of interest-bearing accounts, buying equities that hedge against inflation, and considering Treasury Inflation Protected Securities. 

And, strong companies are using the time to get aggressive. “Everyone I know is buying. They’re not buying crypto. They’re not buying Game Stop shares. They’re buying inventory, buying equipment, buying property, looking for deals. Other companies that aren’t managed well are looking to raise cash, so there’s an opportunity to swoop in.”

Outside the battle against inflation, there are other government measures operators can take at the moment to better manage the business. They include:

SBA Loans. The Small Business Administration is offering Section 7A and 504 loans for operations with fewer than 500 employees. The loans are available at market or below-market interest and can be obtained through an SBA banker, not the SBA. 

State Small Business. There is money available in investments, grants and loans. Marks said there is more than $10 billion available in COVID stimulus funds through individual states.

Inflation Reduction Act. Though there will be higher taxes on billion-dollar companies, there are also opportunities for tax relief for smaller entities. These include tax credits for any company involved in the renewable energy supply chain; energy improvement credits; R&D tax credit increase from $250,000 to $500,000. Additionally, deductions for pass-through businesses that were scheduled to expire in 2025 have been extended to 2027. 

On the other hand, companies should also shore up their accounting procedures because there will be a higher rate of audits in the years to come. 

Filling the Gaps
One of the dominant themes since the onset of the pandemic has been the challenge all industries have faced in filling open positions. If some industries are looking at downturns, it may be a good time for service centers to reverse the talent drain. 

But even if layoffs begin to hit some sectors, such as Wall Street or tech, potential employers will still have to work to lure strong candidates. Marks listed a number of benefits that are particularly attractive with young employees, including HSAs and 401ks. Hiring bonuses, can be used and pay for themselves if the employer fills a position with a veteran, someone out of prison, off welfare or long-term unemployed. 

More important than those benefits, however, is the work environment, a crucial factor for younger people. “If you are looking to hire people, 50 percent are Gen Z or millennials,” he said.

That means work from home must be considered where applicable. While a full remote offering is not always required, some kind of hybrid schedule is becoming the norm. “Every one of my clients is going to hybrid. Most of my clients are working it out to two to three days a week in the office. As long as their managers are OK with that, what do you care?”

Another popular option is the four-day workweek, with longer schedules offsetting the lost day in the office. That schedule has already proven workable in the healthcare industry and can be used on the shop floor and elsewhere. 

Finally, companies must become aware of the increasing importance of mental health. For some older operators, who grew up in an age when the subject was simply never brought up, that’s a major, but inescapable, change. 

“We did not grow up with mental health stuff. It just wasn’t a thing. Times have changed.People are talking about mental health issues. You have to have an answer to that question because you will be asked,” he said. 

Are we in a recession?
Marks began his address at the August Steel Summit with that question, one without an easy answer. 

By historic usage, two consecutive quarters of negative GDP, the answer is a simple, “yes.” But, the textbook response isn’t terribly helpful for the individual business owner. 

There are obvious signals pointing in the direction of a recession, and certain sectors are most certainly in the throes of industry-specific downturns. Construction, for example is in a recession right now, Marks said. Home builder confidence has tumbled, new home sales were off 17 percent in the most recent data and the housing inventory was up 35 percent since January. 

Other indicators for the macroeconomy include a declining in manufacturing growth, small business and consumer confidence both falling in the face of inflation and the potential for more interest rate hikes. 

Conversely, travel levels are nearly at pre-COVID levels, unemployment rates are at record lows and retail sales are largely flat, which is not common in a full recession. Moreover, America’s banks are not seeing major credit issues. 

“Parts of the economy are in a recession, but it’s not another Great Recession. We’re not in 2008 and 2009,” he said.

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