How Should Your Tech Company Respond to Inflation

Jun 24, 2021

EARLY-STAGE-STARTUP-TAXES

By: Kacie Goff

In the 70s and 80s, when inflation was closer to a fairly staggering 10% here in the U.S., tech companies were relatively rare. It’s no surprise. The Great Inflation didn’t create an ideal space for innovation, certainly. Businesses had a tough road to walk, and many didn’t make it out. 

Today, inflation has leveled off. On top of that, an emphasis on innovation and automation has created a national climate where tech companies can thrive. The technology market is booming — but some experts are worrying that inflation might soon be, too. 

With $1.9 trillion dumped into the economy thanks to the American Rescue Plan Act of 2021, some financial experts have been voicing concerns that the system won’t be able to handle it. They’re sounding the alarms that inflation could be coming our way — and fast.

On the surface, tech companies seem better poised to handle inflation than the companies that weathered the Great Inflation. They are, often by their very design, agile. They can innovate on new products and services, potentially giving them a way to launch new price points without upsetting their existing customer base. Still, though, if inflation does come, the businesses that survive it the best will be the ones who put effort into preparing. 

Fortunately, there are some things you can do to respond to inflation that will serve your tech business well. They are:

#1: Maintaining a budget

While the fear is that inflation will jack up overnight, it should be a continual concern for businesses. Even if it continues to happen at a slow creep, the cost of the goods and services your business needs will almost definitely increase over the years.

With a carefully kept budget, you’re able to both account for and compensate for inflation. You can also identify where you might be spending money outsourcing when you could instead do things in-house, where it’s easier to minimize the impacts of inflation. 

Beyond that, a budget helps you identify the nice-to-haves for your business, along with the necessities. That way, if inflation forces you to cut some costs quickly, you’ll already know where you can trim the fat. 

Ultimately, a budget helps you keep a finger on the pulse of inflation and enables you to pivot quickly if it becomes a bigger problem for your business. 

 

Inflation loop: demonstrates the circular process of Supplier to Tech Company to Customer

The Inflation Loop: Image by ShayCPA

#2: Sticking with your pricing

When inflation raises the cost of virtually everything, it’s tempting for businesses to want to raise their prices right along with it. After all, if you’re paying more to buy what you need to deliver your goods to your customers, they should pay more to receive them, right? 

The problem is that inflation affects everyone. Your clients or customers are feeling the very same pinch as your business. If you’re too quick to raise your prices, you risk making your client base feel like you don’t understand their struggle or, worse yet, are well aware of it and simply don’t care. 

Empathy has been a hot topic in marketing over the last year. At the very least, show your customers that you feel their inflation-related pain before you hike your prices. And if inflation does force your hand here, consider getting as transparent as possible with your pricing to show your client base why you made the decision to increase their cost. 

If you can stand to stick with your current pricing for a season even when faced with inflation, you could win customers. If your competitors raise their prices, their clients might come looking for an alternative. With your unraised prices, you look like a particularly good option. 

All of this is also a general lesson in price increases. If your business isn’t in the habit of slightly raising its prices each year — by, say, 1 or 2 percent — you’re not keeping up with inflation, even at its current low levels. That puts you in a position to suffer quite a bit from a big bout of inflation. 

#3: Looking for ways to reduce variability

We’ve already mentioned that bringing as much as possible in-house can help to shelter your business from sudden expense increases because of inflation. But that shouldn’t be the only way you work to mitigate this risk. 

Locking in supplier contracts provides another great way to reduce variability. When you do have to rely on outside vendors for functions of your business, an established contract protects you from a sudden, unexpected increase in expenses. Yes, it’s highly likely that your supplier will eventually try to renegotiate your contract to bring it into alignment with newly inflated prices, but the contract buys you time and provides you leverage to keep expense increases at a minimum. 

#4: Automating where possible

Automation can help with some of the things we’ve discussed above. It can make budgeting easier, and it can help you pull more in-house. That’s because automation allows you to do more with less required manpower and oversight. 

Specifically, from a finance perspective, you should review the automation opportunities with your finance tech stack. Are you taking advantage of the automation tools available today? Implementing a solution like Quickbooks and/or Bill.com can streamline your budgeting, A/P and A/R activities, payroll, and more. By automating the financial side of your tech company as much as possible, you streamline the flow so that it can be as agile as necessary if we face major inflation.  

 

Today’s tech companies have enjoyed an age of slow and steady inflation and, in many cases, their own booming growth. But you need to be prepared for things to flip on their head. It’s too early to say what the recent major stimulus plan will mean for inflation, but smart business owners and managers will be well-served by planning ahead. 

We can help. For support establishing a budget that works for your business, automating your finance tech stack, and more, don’t hesitate to contact our team at ShayCPA. As hands-on CPAs specializing in delivering robust financial support for all of a tech company’s accounting and tax needs, we’re experts who can help you prepare for inflation — and whatever other obstacles your business may face.