How Inflation Impacts Risk Management

April 17, 2023

Inflation and economic uncertainty have a negative impact on business operations, and there are many factors to consider. Ultimately, leaders must make decisions in the face of fluctuating stock values, tougher lending criteria, and soaring prices for goods and services. From a risk management perspective, there are concerns that inflation will negatively impact the value or performance of the business’s assets or investments. Inflation also can negatively impact how far the revenue stream can go.

Risk management is a three-tiered approach to addressing an organization’s risks with earnings and capital. The process starts with identifying the risks, assessing the impact and potential areas of involvement, and it ends with continually controlling these risks and their impact. The risks could come from legal liabilities, financial instability, security breaches, or strategic management errors. In times of uncertainty, such as inflation, your organization could get caught off guard by a previously unrecognized threat.

Unforeseen events are not always a problem, especially if a risk management plan is in place. The severity of the impact depends on how well the plan addresses and mitigates risks. Many business leaders lack experience dealing with inflation, compounding the impact that inflation can have on a business.

Are There Risk Management Strategies for Times of Inflation?

Since inflation is volatile and can change without warning, your business needs to be agile and able to adapt to the situation. It means including short-term and long-term plans in your management strategy.

Evaluate the Future Forecast

Conduct a financial forecast for your company and include potential scenarios to give you more direction on how inflation will impact your business. Things to consider include supply chain disruptions, wage hikes, and skyrocketing costs of goods. By forecasting these what-ifs, you can proactively address how to mitigate and control these risks.

Put Some Diversity in Your Supply Chain

Although you can’t prevent rising costs or interruptions with your supply chain, you can still take mitigating steps and work toward sustainability. Look into domestic alternatives and rely on multiple vendors for your goods. It could create a short-term increase in expense, but preventing a shortage of materials or a significant rate hike from one vendor can save money in the long run. Begin strengthening your relationships with suppliers and negotiating favorable contracts as you wait for inflation to subside.

Reign in Spending

Guarding your finances is vital to risk management, and in times of inflation, cautious and controlled spending can help preserve your bottom line. Make smart cost cuts directly impacting profitability, and think strategically about how you spend money. Steps to take could include:

  • Eliminate unnecessary spending, such as workplace perks.
  • Cancel autopay and strategically pay bills to keep cash in the bank.
  • Limit overtime or consider automating tasks to reduce labor costs.
  • Make sure spending is purposeful and directly supports company growth and profitability.

Support Your Risk Management Plan

Comprehensive business insurance is a crucial part of a robust risk management plan, although inflation could mean it’s time to reconsider your policy limits and the valuation of your assets. Your current coverage may be insufficient due to the impact of inflation on the costs to replace or rebuild. Give your company a chance against inflation by working to address potential problems now.

Contact a Brooks, Todd & McNeil Agent Today

Our dedicated team can make sure you and your business are prepared to deal with the effects of inflation. We can review your current coverage and assess how to mitigate your risks. To learn more about our products and services, contact us today at (800) 448-4567.