How Should Small Business Owners Respond to the Recent Rise in Inflation? – LJ Suzuki, CFOshare

Over the past year, we’ve seen inflation become a concern for man, as shortages and prices continue to climb. On today’s show, we’re pleased to welcome small business expert, serial entrepreneur, and CEO of CFOshare, LJ Suzuki, to discuss the rise in inflation and what he recommends business owners do.

Transcription:

Jim Fitzpatrick:
Thank you so much, LJ for joining us on the show.

LJ Suzuki:
Good morning. Thank you for having me.

Jim Fitzpatrick:
Sure. So for those viewers out there that aren’t as familiar with your story as we are here at the show, share with us a little bit about your background.

LJ Suzuki:
Yeah, so I was originally educated as an engineer, but fell into finance work due to the kind of heavily mathematical statistical nature of it. And I worked in industry for a number of years for big businesses and small businesses. But after my last stint, I realized that most small businesses cannot afford to have true financial strategists on their staff, usually they just have a bookkeeper. So I started CFOshare, which is a group of outsourced financial strategists that work part-time to help small businesses with their forecasting budgeting and planning.

Jim Fitzpatrick:
Sure. Sure. And every small business, as you said, could use that person, and sometimes they don’t even know that they could use that person because they don’t know that a CFO is available to them under circumstances like that, right?

LJ Suzuki:
Absolutely. It’s a major competitive advantage that big businesses have over small businesses, so we’re helping level that playing field, by making it affordable for small businesses.

Jim Fitzpatrick:
Yeah. Boy, that’s for sure. That’s for sure. I will tell you as an entrepreneur myself, having the availability to have a CFO on kind of a part-time basis or as we needed them, I don’t know what I would do without them looking back now. So it was a huge game changer for us. So let’s kind of jump right in here. First and foremost, what’s causing inflation right now?

LJ Suzuki:
Yeah. So there’s a couple things, first of all, the economy is reopening, as we all know, and we’re all excited to go travel, to go out and see our friends, to go to our favorite restaurant, right? So it’s this huge surge of pent up demand as a result of COVID-19. On the other side of that, we have a lot of supply shortages, right? Factories that have been working at lower capacities or supply chains that have been constrained because of supply issues like the clog in the Suez Canal or other things like that.

LJ Suzuki:
And then the federal government has dumped a ton of money into the economy. And all of that money is causing us to go out and try to spend, which is just exacerbating all of these problems. Now, the Federal Reserve thinks that these are going to be short term inflationary pressures, but some people are speculating that this is going to create longterm inflation and business owners need to have strategies in place for either situation.

Jim Fitzpatrick:
What do you believe?

LJ Suzuki:
I personally believe that we’re crossing pretty unprecedented territory just in terms of the amount of money in the economy. And I can’t imagine that that is not going to have a longterm impact. Now it’s going to have a different impact on every industry and every business. So as a business owner, your responsibility for planning right now is figuring out how is that going to affect me and how do I manage that risk?

Jim Fitzpatrick:
Yeah, for sure. How is this affecting small businesses right now?

LJ Suzuki:
Yeah. So a lot of small businesses are seeing the immediate term impacts of inflation, which is shortages. A great example is cars, right? A lot of car dealerships have empty lots. They can’t get their hands on cars because car manufacturers can’t get computer chips, so that’s what people are seeing a lot of in the short term. A lot of people are also seeing labor shortages. We’re hearing about how McDonald’s is paying people $50 just to show up to a job interview, whether they get the job or not, because they can’t get people to show up and flip burgers.

Jim Fitzpatrick:
That’s right. Somebody sent us a picture of a sign that said Burger King was given a $2,000 signing bonus, if you go to work for them, because they felt as though, its better to overpay for help, then to be closed all together, right?

LJ Suzuki:
Yeah. We’re talking about the most unskilled labor, right? Just like fast food work. As you get up the chain, as you get into computer programming or accounting or healthcare workers, it gets even worse.

Jim Fitzpatrick:
That’s right. So what do you recommend business owners do during times like this?

LJ Suzuki:
Yeah. So the first thing you have to do is you have to understand what is your vulnerability to inflation. It’s going to be something on your cost side. It might be that you can’t get employees. It might be that your employees are demanding pay raises, or they’re leaving you for competitors that are paying more. Or if you’re in retail or manufacturing, it could be these supply shortages, or it could be pricing increases. One thing that we saw actually starting in the Trump era, when he introduced the tariffs was the price of raw materials, rising pretty dramatically. A lot of that’s being exacerbated now, copper and steel and all those raw materials, those prices are going up. And if you are a manufacturer that is selling to your customer on a fixed price contract, you’re absorbing those losses. Those are just eating away at your profits.

Jim Fitzpatrick:
That’s right. That’s right. So what would be next on your list?

LJ Suzuki:
Okay. So once you evaluate what your risk is, you need to figure out ways that you can manage that risk. One thing we talk about with raw materials, for example, is financial hedging or engaging in long-term supplier agreements to help stabilize that cost and make it a little bit more manageable for you. If employees are a major risk of yours, you need to understand why would an employee leave your organization? Is it because you’re not paying them enough? Is it because their work isn’t interesting or challenging? Is it because you have a really toxic work culture, and the only reason they stick around us for money? Because when the competitor offers them more than the leave your organization. So again, it’s going to be different for every business. But the ultimate thing that every business needs to work on during inflationary time period, is their pricing power. Because in the long run, the only way you can deal with inflation, is by increasing your prices to your end customer.

Jim Fitzpatrick:
Yeah. That’s for sure. And you talk a little bit about the forecast the what if inflation scenarios. Talk to us about that.

LJ Suzuki:
So every business should have an operating forecast in place that you’re updating on a monthly basis to understand how is your cashflow moving? How is your balance sheet shifting around? What are your current forecasted sales compared to what you originally budgeted? But a forecast is also an excellent tool for what if scenarios? What if my employee costs double? What if I lose a quarter of my revenue because of supply shortages and can my business survive that kind of shock? So use that tool to your advantage, to understand where your vulnerabilities are, what you can and what you cannot withstand.

Jim Fitzpatrick:
That’s right. That’s right. And if you see those vulnerabilities or you see where there might come a shortage of cash, which is as you know, the lifeblood of any small business owner out there, you say, “Take out a loan.”

LJ Suzuki:
It’s a great time to borrow right now. Interest rates are at an all time low. If you’ve got good credit and you’ve got a good place to use that money, either… One thing that I like to tell people, like now’s a great time to invest in equipment, if you need more equipment, because you can buy it at pre inflationary prices and you can finance it with pre inflationary rates. So you begin paying that equipment back with lower money. So if you have credit, you can make an investment in real estate and equipment or in just the growth of your business, now’s a great time to do that.

Jim Fitzpatrick:
Yeah. Like you said earlier, there are opportunities in this inflation situation that we find ourselves in right now.

LJ Suzuki:
With every risk, there comes a potential for reward, and it’s up to the entrepreneur to manage their business towards the opportunity, rather than towards the downside.

Jim Fitzpatrick:
That’s right. Who was it that said, “Don’t ever waste a good crisis.” Right?

LJ Suzuki:
That’s right.

Jim Fitzpatrick:
That’s what we’re in today. So what are some of the things that keep you up at night, in addition to this inflation situation that might worsen? What does a small business owner, as an entrepreneur, as an investor, somebody that’s got their hand on the pulse of all things small business, what do you see around the corner, that might be a concern for our viewers?

LJ Suzuki:
The other major macro trend that we’re seeing right now is baby boomers that are retiring and the prior generations having to take that over. And I just heard the other day, there’s $21 trillion worth of businesses that are owned by baby boomers. We’re not talking about publicly traded stock here. We’re talking about privately held businesses that are going to need to change hands from one generation to the next. So that creates an incredible opportunity to buy a business at a discount because there’s a lot of businesses that will be for sale over the next five years and not so many buyers, but that also could create some crises where if they can’t find a buyer, maybe they’ll just decide to fold the business or maybe they’ll die unexpectedly, pass it onto their family, their family will mismanage it. And so I think there’s a big risk as we look at this transfer from the boomer generation of business owners, to the next generation, how we’re going to be able to manage that and how that’s going to affect the supply chains and the economy overall.

Jim Fitzpatrick:
We’re seeing that in the automotive sector now with automobile dealers that are aging out, so to speak, something that you just mentioned, the vast majority of automobile dealers are made up of baby boomers. And so there’s a tremendous amount of M&A activity in retail car dealerships right now for that very reason.

LJ Suzuki:
Absolutely. And so if you are not in that generation, if you’re gen X or a millennial or gen Z, it’s a great opportunity for you to buy a business, or if you have a business, to understand if maybe some of your competitors are going to go for sale, and to learn about mergers and acquisitions, to keep yourself competitive, as consolidation occurs.

Jim Fitzpatrick:
Sure. A friend of mine bought a business from somebody that was heading towards 70 and they wanted to sell it. They tried to sell it for cash. They didn’t find any buyers for cash. They didn’t have any family members that wanted to take the business over. So my friend was able to actually pick up this business, which happened to be a restaurant and for basically paying out of the receipts of the business.

Jim Fitzpatrick:
Actually really no money down, just taking over the business with a promissory note to the prior owner that wanted to retire to say, “Look, I’ll pay you $10,000 a month out of the proceeds of the business until I get to the sale price, and get free title to the business,” and it worked well for the seller, because the alternative was to actually lock the door and sell all the belongings that he had inside those four walls, that wasn’t going to bring a whole lot of money as you know. So it worked well. So yeah, there probably are a lot of opportunities out there, to be able to find a business that works for you and work out negotiated or negotiate terms that are favorable to both sides.

LJ Suzuki:
Yeah. And again, remember we were talking about inflation, one way to borrow money at low interest rates right now is to buy a business and finance it through the seller like that and be paying the seller 5% interest or something like that. Even if you go with an SBA loan, SBA loans are at unbelievably low rates right now, I think like 6.75%, and if inflation is going to be 4 or 5% for the next few years, that’s basically free money.

Jim Fitzpatrick:
LJ Suzuki, CEO of CFOshare. Thank you so much for joining us here on the Atlanta Small Business Show. I know our viewers and subscribers get a lot out of your visit here today. I’m sure we’re going to have a tremendous amount of questions for you for the next time that you join us on the show. So thanks so much, really appreciate all the time you gave us.

LJ Suzuki:
My pleasure. Thank you so much.

Jim Fitzpatrick:
Thanks.

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