I have written in previous issues about planning for the coming year and what pitfalls your business might face in 2024. As the year begins, its time to take a look at the overall economy and business environment and how you should be prepared.

Inflation continues to be problematic. My last article noted that inflation has come down considerably from its 40-year high of 18 months ago. However, over the past couple of months it has crept up a bit, again. At the end of 2023 inflation was 3.4 percent. In January inflation checked in at 3.1 percent, down slightly but still above the target set by the Federal Reserve. It’s also being stubborn about getting lower.

The primary weapon in fighting inflation is adjusting interest rates.  Over the last two years, interest rate increases have become almost routine. In March 2022, the Federal Reserve interest rate was between 0.25 percent and 0.50 percent. By February 2023, the interest rate had risen to between 4.50 percent and 4.75 percent. July 2023 saw the peak interest rate of 5.25 percent and 5.50 percent. That is where rates are today.

Given the moderation of inflation, the chairman of the Federal Reserve forecasted interest rates could start being reduced in the first calendar quarter of 2024. That was encouraging news which gave the stock market an extra boost for a few days. Then the latest inflation numbers came out, as noted above, and the chairman said rate decreases would likely be pushed off until later in the year.

As much as the possible reduction of rates led to a mini stock market rally, so the comment of rate reduction being pushed led to a minor, though significant, retreat.

I addressed the direct impact of inflation in my last article, and noted that even as inflation came down prices remain elevated. The effect of elevated prices is obvious on many everyday commodities in life, but may be a little less so in your business. Here area a few to consider.

Wages – To get and keep good employees you want to pay a wage that will allow them to maintain more than a subsistence lifestyle. All of the inflationary impacts you’ve seen in your business have impacted your employees individually, too. What are you planning to do and can do with your business pay scales?

Utilities – Many jurisdictions have utility rate boards that need to approve rate increases. Water and electricity rates have been on the rise as utilities have been investing in renewable energy sources that have longer-term payback, but require significant immediate funding. Those costs have been escalating by double digits, causing a couple of very large offshore wind farms to be cancelled because of lack of funding, or because the necessary rates needing to be charged were too high. Have you factored the impact of higher utility costs?

On a different tack, extreme temperature swings, coupled with the retirement of fossil fuel power generation (before sufficient renewable generation comes on-line), have forced some utilities to enforce rolling blackouts. Have you considered the impact of possibly reduced operating hours due to power outages?

Taxes – This is a business cost component that bedevils not only business leaders but those who set tax rates. The double whammy of the escalating government deficit and the rise in interest rates added $184 billion to the cost of servicing the debt in 2023 over 2022. Reducing interest rates will ease the issue somewhat, but the increasing deficit will counteract most of it. As I write this there isn’t a federal budget for fiscal 2024, so the picture is a bit muddled as to what may happen. Because this an election year, it is likely taxes will stay as they are at least at the federal level. The city, county and state levels will be under increased pressure to fund local education, police and fire protection and social services. Already resources are being stretched in major cities around the country because of the influx of migrants across the southern border. Will these local jurisdictions be raising tax rates, or propose special assessments, to stabilize their own operating budgets? Does your business plan include contingencies for higher tax rates?

Cash Flow – Working capital is the life blood of any business. Do you have a credit line established with your local bank/lender? Are you sure? The increase in interest rates has put a lot of pressure on smaller regional banks, forcing them to offer higher interest paying instruments to their customers. They are doing this to hopefully increase deposits, or at least slow down withdrawals. That low interest line of credit you thought was ready when needed may have been cancelled or superseded by one with a rate 2-3 percent higher or with a much shorter term. Already some retailers are finding out their expected credit line has been cancelled or modified, having a very negative impact on their business.

Insurance – Have you had a recent conversation with your insurance broker? If not, you need to do that. Inflation has hit the construction industry with increases beyond the nominal rate. This has put upward pressure on insurance rates for the coming year. Rate increases in the 15 to 20 percent range are not unusual. Rates have risen in some locales enough that politicians are starting to pay attention and asking for justifications.

These rate increases are coupled with more and more jurisdictions issuing regulations on the certification, sales, storage and repair of e-bikes. Insurance companies are taking note of this as well, and will be looking at your business to make sure you are compliant. Will your business pass this scrutiny?     

Operating Hours – When is the last time you did a customer count? Over a period of a couple of months, you should be counting the number of customers that come into your business, noting the day of the week and the time of day. This will help you determine staffing and whether you can/should adjust your business hours to better serve your customers. A corollary is comparing customer counts to sales transactions. That will establish a close rate, a good thing to know to help you understand the impact of your marketing and the efficiency of the sales staff.  

The coming year will be challenging. However, with proper planning and guidance it can still be profitable and lead to better years to come. Are you ready?

Contact Steve Bina: steve@humanpoweredsolutions.com.