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All about deflation

Posted 3 years ago in Advisors by Grant Anderson
Posted by Grant Anderson

What is deflation?

You may have noticed some news articles recently talking about deflation with some economists telling us that deflation is really bad for the economy, but others saying “Meh… it’s not so bad”. Put simply, deflation is the opposite of inflation. Deflation occurs when prices go down. Your money buys more tomorrow than it buys today.

How will deflation affect me and my business?

Most economists think that NZ will have a short period of deflation lasting from six months to a year. This is good news for kiwi small businesses as it adds some spending power to consumers in the short term, and should not be long enough to delay business investment decisions.

  • Interest rates should remain unchanged during the rest of 2015.
  • Lower oil prices will keep fuel costs down leading to lower freight and delivery charges. SMBs could achieve some windfall profits on the back of this as long as they can keep their prices up.
  • Turnover should remain stable. Households should continue to spend, although purse strings may tighten if the NZ economy seems to be heading into a prolonged period of deflation.
  • Cost management should get a little easier. Most of the overhead costs for small businesses should decline slightly over 2015, easing some cashflow pressure. However, there is unlikely to be any decline in wage costs over this year as employees will resist wage cuts, even with deflation.

Five questions to ask yourself

The main thing a business owner can do is plan. Having a plan in place before something happens will always ensure you have a better response.

Questions you should ask yourself, and plan for, include:

1. Is there opportunity for me to expand my business while households have more spending power?

  • Have some promotional ideas ready to try, such as special deals.
  • Think about new markets/locations or products/services that you may want to add to your business.

2. Are there costs in my business that I can eliminate, decrease or defer?

  • Good cost management is always beneficial. Review each cost line in your profit and loss report.

3. Can I free up cash?

  • Chase up overdue debtors’ invoices.
  • Review your inventory to ensure your holding levels are appropriate. Sell off surplus inventory and get rid of obsolete items.
  • Review your fixed assets. Are there fixed assets that are under-utilised or no longer needed? Now might be the time to sell them off too.

4. How can I be more efficient?

  • Is there a better way to do things?
  • Can I re-invent my business to stay ahead of the competition.

5. What did I learn from the last global financial crisis?

  • Have a plan in place, based on your experiences from the last global financial crisis. That way you can be prepared, and respond quickly.

Conclusion

Deflation is not necessarily a bad thing. In small doses, it brings extra spending power to households and small businesses. NZ looks set to have a short period of deflation of only six to twelve months.

There are a number of prudent measures that small business owners can take to minimise any impact of deflation. These include freeing up cash by selling off surplus assets, reviewing expense management and reflecting on learnings from the recent global financial crisis.

By planning and preparing in advance NZ businesses can minimise any negative effects of deflation and maximise the opportunities it presents.

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