Inflation: what can you do about it?

King’s warning came as official figures from the Office for National Statistics showed that the Consumer Prices Index (CPI) had jumped to four per cent in January, up from 3.7 per cent in December and the biggest increase in more than two years. King pointed the finger of blame at the surging price of oil, petrol and the increase in the rate of VAT.

For small-business owners, profit margins have suffered from rising costs. For homeowners, bills are going up but income is not.

The days when British workers could expect pay rises averaging 1.5 to two percentage points above inflation ended with the recession of 2008-09. With prices rising twice as fast as pay, real wages are likely to be no higher in 2011 than in 2005. Pretty dismal.

As an entrepreneur, what can you do about it? Modwenna Rees Mogg, who runs AngelNews and VCR Directory, published some excellent tips in her newsletter this week. Take note:

  • Hang onto as much cash as possible so you can meet those unexpected demands for higher wages and growing demands for price rises from suppliers.
  • Borrow if you can as inflation will eat away the capital value of your loan.
  • Watch out for new and more aggressive “inflation protecting” terms in investors’ terms sheets when fundraising.
  • Plan for your exit. What terms will you want? Would you rather be paid in pounds, dollars the renminbi or shares or even physical property?
  • Keep on top of the management accounts. Know at the close of every day what money you have in the bank, what you are expecting and what you owe. Keep your investors informed too – weekly conference calls, more rapid preparation and distribution of management accounts and the rest.
  • Reshape your business if possible to make your cash turn over quicker; reshape it again to make cash turn over even quicker than that.
  • When preparing your financial projections, remember to account for inflation in the forecasts.
  • Adjust your cash flows to take account for late payers and slower buyers.
  • When doing well, store the company’s wealth in inflation-protected but liquid assets (it could well be worth putting some of your spare cash into A grade quoted equities, rather than on deposit at the bank).
  • Plan for staff turnover of good people as your competitors try to nab them off you. Think about your policy now – can you give them non-cash perks?
  • Watch out for cost inflation in unexpected areas – travel for example; put your prices up ahead of the costs.
Finally, keep your chin up. The Bank of England says that today’s inflation rate – twice its official target and likely to rise further in the coming months – is a temporary blip that will fade in early 2012 as one-off shocks (such as the VAT hike) fall out of the annual comparisons. It’s unlikely that commodity markets will sustain their current pace, and inflation will start to fall. Hang on in there. 

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