Inflation is About More than Higher Prices for CFOs
Go to any grocery store, restaurant, hotel, or gas station and it’s clear that 2022 is giving new meaning to the word inflation. In fact, inflation in the United States has soared to its highest point in 40 years. Between the supply chain disruptions, labor shortages, unprecedented government stimulus, and shifting consumer spending that have occurred around the world, and particularly in the United States, companies are feeling the crunch (and some may say, seeing the opportunity).
In Deloitte’s recent survey,CFO Signals™ , inflation was listed as a top concern for three-quarters of CFOs. And a vast majority, 76%, indicated that raising prices would be at least part of their response to offset increases in costs. This seems logical, of course, but there’s much more to it, with ramifications that can extend far beyond this year.
For CFOs, it’s not merely about paying more for products and services or raising prices in an attempt to counteract those increases, it’s about reprioritizing strategies in an incredibly volatile environment. Specifically, many will not only adjust prices, but also look for cost-saving opportunities and prioritize the sale of high profit margin products. While the uncertainty creates challenges, it can also create opportunities when the company is open to them.
There are a variety of strategies that CFOs can utilize. According to an article in CFODive, “[i]n addition to raising prices, companies are adjusting to higher inflation by cutting costs, negotiating with suppliers, diversifying their supply chains and relying more heavily on advanced technology such as data analytics.”
The strategy deployed will likely depend on the size of the business and how many products or services they offer, among other factors. For example, smaller and medium sized businesses haven’t been as willing to raise prices. They are more often on the forefront with their customers and, with regular interaction, are trying to keep prices the same for them. Yet, they are experiencing the drastic increase in their cost of goods sold, as well as their payroll to get top talent in this highly competitive market, just like everyone else. And if they don’t increase their prices, they may soon find themselves unable to keep up and out of business.
Additionally, most businesses have different profit margins for different products. It only makes sense to try to sell the higher profit items sooner rather than later. This can be accomplished in a number of ways from merely suggesting the other product to the customer or explaining that the original product will be delayed, but they have an alternative for it. Companies do this all the time to get the high-profit product out the door faster and by extension, get more money into the accounts faster.
Navigating the uncertainty around this extraordinary high inflation will be a priority for business planning in upcoming quarters. For CFOs, they must consider the following questions:
How long will the supply chain disruptions last?
How is consumer spending shifting?
How much are wages increasing?
After careful consideration of these questions, CFOs can analyze future scenarios (inflation levels out, continues to increase, or drops as drastically as it has risen) and develop strategies under each. They can then determine the impacts to operational strategy, human capital, supply chain, pricing, restructuring, real estate, and taxes for both the short and long term.
Barker Associates provides strategic guidance to companies of all sizes. We provide the higher level of strategy your company needs to grow, especially as it relates to the issues affecting the bottom line, such as inflation and the strategies used to combat it to keep your company running. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
Cash Plus Cultural Literacy What Private Equity Needs in Lower Middle Market Deals
Last year was a record year for private equity. With pandemic related stimulus, there was an increase in dealmaking and exits, as well as new records in deal values. But the drastic increase in inflation, along with extensive supply chain disruptions throughout the world, left many wondering what would happen in 2022.
Much of that speculation is the continued shift in attention toward growth equity and middle markets. Lower middle markets (defined as $5m – $100m in revenue) offer innovative solutions and compelling business models, and they are ripe for private equity investments. Yet, there appear to be some challenges – namely, cultural literacy – holding back some of these deals.
We’ve all been hearing about the importance of organizational culture recently. It has seemingly never been as important in trying to attract top talent and offer an engaging, fulfilling employee experience. But long before the Great Resignation left leaders scrambling to fill vacant seats, lower middle market companies placed great value on their culture.
These are companies that more often than not still have their founders involved, working toward their vision to move their companies further along. There is a sense of pride and accomplishment. There is often a sense of family when it comes to employees – these are the people who helped the founders realize their vision in the first place. And this strong sense of culture is not taken lightly.
When a private equity firm is interested in a lower middle market company, they must first understand this culture – and that it is different from larger companies. Cultural literacy creates the level of trust required for a successful deal. It’s as important as speaking the same language (or having a really great interpreter). But too often, that’s not the case. They are simply not accustomed to dealing with each other … and they must learn each other’s languages.
Why the Disconnect?
There are many reasons the “languages” differ among lower middle market and private equity firms. However, finding common ground is crucial to making these deals that will ultimately benefit both parties.
Education. A majority of investors at private equity firms hail from top universities, with advanced degrees, whereas successful lower middle market founders and leaders may not have pursued graduate degrees. In some cases, they may not even have undergraduate degrees. Degree or not, their success often stems from their incredible innovation, hard work, and perseverance.
Experience. Many in the lower middle market have little or no experience in mergers and acquisitions, while, clearly, private equity firms have plenty. That, in and of itself, can be an entirely new language to learn.
Values. The founders of lower middle market companies typically have strong employee retention rates. In fact, some of their employees may have been there since Day 1. They are a family, and founders want to protect their families. Many will care as much, or even more, about their employees than a big payday. Private equity firms must shift to understand that the purchase price may be only one piece of the total value to them.
These are not insurmountable challenges. And with consideration of each party’s perspective, these deals can, and will, go through successfully. But just like in any deal where different cultures exist, it takes time, patience, and understanding.
Barker Associates provides strategic guidance to companies of all sizes. We provide the higher level of strategy your company needs to grow, especially as it relates to the support needed in a merger or acquisition of any size. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
Credit Check – It’s National Credit Education Month
March is National Credit Education Month. If you’ve ever applied for a credit card or a car loan, you know the importance of having good credit. At its foundation, it demonstrates to a lender how likely it is that you will repay your debt on time. Having good credit benefits you in countless ways, while having bad credit can challenge you in just as many.
This month serves as an important reminder for us all to check our credit scores and implement tools and tips to help improve it, if need be. Overall, it’s about increasing our knowledge around credit, including the amount of debt we carry, the age of our credit history, reports to collection agencies, the effect of late payments, high interest, and hard inquiries, and the number of accounts we have.
While this monthly designation is focused on personal credit, both maintaining it and improving it, it also presents an ideal opportunity to look at the importance of business credit. Just as with personal, its significance lies in showing a lender your reliability in paying back debt on time. Simply, consistently monitoring the financial health of your business is a crucial part of running a successful business.
What is a Business Credit Score?
Similar to a personal credit score, a business credit score (also known as a commercial credit score) is the primary indicator of your business’s creditworthiness. It’s a number that indicates if a company is a good candidate for a loan or other extension of credit by vendors or partners. One difference from a personal credit score is the numbers themselves. Instead of the 300 to 850 on the personal side, a business credit score ranges from 0 to 100 and will be reported most often on Equifax, Experian, and Dun and Bradstreet.
To determine if your business is financially risky or stable, consider the following factors:
a company’s credit obligations;
repayment histories with lenders and suppliers;
any legal filings, such as tax liens, judgments, or bankruptcies;
how long the company has operated;
business type and size; and
repayment performance compared to that of similar companies.
Why is Business Credit so Important?
If a company wants to take out a loan to purchase equipment, lease property, or obtain better terms on a supplier contract, the lender/supplier will consider its business credit score. The lender will also consider the company’s revenue, profits, assets, liabilities, and collateral value of the equipment or property, if applicable. Essentially, you will need your profit and loss statement and balance sheet ready for review. In some instances, particularly with small businesses, lenders often check both business and personal credit.
Having good credit for your business will help you qualify for financing faster and easier to purchase an asset or help cash flow issues. It may also help you secure lower interest rates, saving you money over the life of the loan. Another benefit is the likelihood of getting better repayment terms with suppliers, helping your cash flow remain positive. Further, having a strong business credit score can help protect your personal credit score. Without business credit, lenders will have to rely on your personal credit. You should try to avoid this situation, if at all possible, as it increases your credit utilization ratio, and consequently, increases the likelihood of a negative impact on your personal credit. And if something happens with the business, it could take you years to fix it.
Five Steps for Establishing and Improving Your Business Credit
The following five steps can help establish and then improve your business credit score:
Open a business bank account
Open a business credit file (for example, on Dun & Bradstreet)
Get a business credit card
Establish a line of credit with your suppliers or vendors
Pay all of your bills on time
Barker Associates provides strategic guidance to companies of all sizes. While we provide the higher level of strategy your company needs to grow, we also never minimize the basics, including the importance of business credit. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
Adaptability – the Key to Leadership (and Business) Success
Our world is in constant flux. We know that. We hear it. We see it. We feel it. But what does that truly mean for businesses? Why have some thrived through this prolonged disruption, while others have succumbed to it? What exactly sets them apart?
Answering these questions is crucial because if anything is clear in this sea of haziness it’s that the change we’re experiencing in business is far from over. We still have remote and hybrid workforces, severe supply chain issues, skills gaps, employee burnout, and a number of other issues that require leadership, and organizations, to be adaptable.
We’ve heard a lot about adaptability, flexibility, and resilience throughout this time, but they’re much more than words thrown around. In fact, according to research conducted by McKinsey & Company, “[A]daptability is the critical success factor during periods of transformation and systemic change. It allows us to be faster and better at learning, and it orients us toward the opportunities ahead, not just the challenges.”
Key Areas to Improve Adaptability
While organizational adaptability is needed throughout every level and every department, permeating the company culture, there are three specific areas on which leadership should focus long term:
Technology. Without a doubt, the digital transformation allowed us to stay in business during a global pandemic. But, as its name calls out, it was, in fact, a transformation. It was (and still is) change to which we have to continuously adapt. Through it, we have realized new capabilities we never knew we had, or needed, including the ability to provide services virtually, a critical component for survival. The question going forward is – what else can we learn from what we did before, not from a reactionary perspective, but an anticipatory one? How can we remain adaptable with technology to better leverage the efficiencies and solutions it provides? Remember, there are higher expectations all around, especially from clients who know we are “always connected.” While boundaries are certainly needed, we still need to be able to meet their heightened needs.
Focus on new opportunities. It’s no secret that challenges bring innovation, creativity, and opportunities. Take, for example, face masks. Three years ago, who would have imagined that face masks would be a multi-million-dollar industry? But with change and disruption comes opportunity … as long as you have the ability to adapt. Leaders should always be looking for new opportunities, even if it means rethinking their own processes. This isn’t a case of if it’s not broke, don’t fix it. Even if it seems to work well, it does not mean it can’t be better. Essentially, our processes need to be adaptable too.
Prioritize analysis of trends. Leaders should stay aware of what is happening in the world in terms of global trends, overall economic trends, and specific industry trends. What some learned painfully is that if we find out about them too late, there often is not enough time to adapt effectively. Leaders must have the ability to shift along with these trends. This doesn’t mean creating an entirely new business model. It means proactively making adjustments to stay competitive by predicting future needs and demands. For example, many businesses have had to adapt to economic changes to ensure pricing is in line with budgets or face the alternative of losing money with every sale.
Adaptability is not about just getting through hard times, but about long-term success. It requires leadership, discipline, and accountability. Barker Associates provides strategic guidance to companies of all sizes. We can provide the higher level of strategy your company needs to grow. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.