Boardman
Inflation continues to be the leading concern of many small businesses, says the National Federation of Independent Businesses (NFIB), an association representing about 300,000 small businesses in the U.S. and giving small businesses a voice in government policy making.
Inflation has fallen from its recent high of 9 percent in 2022, a spike driven by the pandemic and the supply chain disruption. The most recent NFIB quarterly economic trend survey reported that inflation had dropped to 3 percent, then rose to 3.5 percent. The study found the compensation gains along with “supply shocks and sales growth” are driving price increases.
Fereday
Small business owners “remain historically very pessimistic, with optimism at low levels and expectations for economic performance in the second half of the year depressed,” the report concluded.
With inflation as the leading challenge facing small business, Business Lexington reached out to several local financial advisors for their views on how to best contend with inflation. Below are the responses from John Boardman, founder and CEO of Ballast wealth management, and James Fereday, chief investment officer with WealthSouth.
Have your clients expressed concerns about inflation? What advice have you given to help mitigate its impact?
Boardman: Inflation is a huge topic of conversation among all clients, particularly business owners. Although inflation may have slowed, there are no signs of prices coming back down to where they were a few years ago. Sound, accurate and realistic budgeting based on current (or even higher prices) is something we should all do on at least an annual basis. For business owners, this should be done as often as monthly or quarterly so that they can accurately modify pricing and expenses, if necessary.
Fereday: Because of rising prices, margins and profits have been negatively affected, forcing business — particularly small business — to adjust business models. Many input costs ranging from commodities to labor have increased double digits in a relatively short span of time. We recommend businesses pay particular attention to operational efficiency and cost management. This is a good time to review your suppliers, the diversity of those suppliers, and attempt to negotiate pricing as much as possible. This can be difficult for smaller businesses that don’t have the pricing power compared to their larger brethren but is still worth investigating options. As part of the efficiency equation, we also recommend businesses review technology that can potentially streamline their processes and hopefully reduce long-term costs.
What kinds of strategies do you recommend for your clients to better deal with inflation while still funding investments and retirement accounts?
Fereday: For many investors, the current environment we find ourselves in is completely foreign, with interest rates at generational highs and bond valuations looking attractive for the first time in years. Subsequently, there are strategies on the margin that make more sense right now. However, basic principles of maximizing 401(k)/retirement contributions, taking advantage of company matches and profit sharing, and lowering current taxes is always good practice no matter the inflationary environment.
From a pure investment perspective, we encourage clients to review objectives for short, medium, and long-term needs, aligning appropriate types of investments. Stocks have historically been the best place to be to outrun inflation however they have increased volatility, so exposure may not be appropriate for all investment needs.
Certainly, if you have more than 10 years until retirement or a longer-term investment need we recommend tilting your investments towards equities and like-kind risk assets. Within risk assets, exposure to natural resources, real estate, infrastructure and inflation-protected bonds are excellent ways we protect clients from inflation eroding their assets. In general, real assets have lower correlation to stocks, protect purchasing power, and often provide good cash flows.
Boardman: For the first time in decades, infl ation has been a real challenge for consumers and businesses. This is a great opportunity to review and optimize your budget. We all pick up new ongoing expenses over time and this is a wonderful opportunity to look for ways to save on expenses that are not as important to you.
What general recommendations can you make for our readers to better cope with inflation?
Boardman: Update your budget to be realistic with today’s prices and costs. For individuals, we look at our ongoing expenses and look to prioritize the most important items — i.e. mortgage, retirement savings and college savings — and consider removing or at least reducing those expenses that are more discretionary in nature, such as dining out, travel, clothing, etc. For businesses that are facing growing costs, budget optimization is a must. Determine exactly what is needed to run the business and build out any necessary additional expenses from there.
Fereday: From a banking standpoint, we encourage businesses and individuals to establish lines of credit prior to economic downturns, ensuring they have flexibility in cash flow to endure through any difficult periods. Maximizing cash yields is a layup in the current high interest environment, often paying north of 5%.
We recommend reviewing all your cash holdings in savings, investment and brokerage accounts to ensure you are being paid a competitive rate. Just like businesses, families and individuals should also take the time to revisit the expense side of their ledger, minimizing unnecessary costs.
Another good general investment practice is to review your overall asset allocation, rebalance assets to align with objectives and avoid becoming overweight in sectors where valuations are extended. Unfortunately, there is not a silver investment bullet to combat inflation that fits all situations. A tailored approach, which leans on several strategies, can help to alleviate some of the pressures.