Your Official Inflation Notice

A number of my clients have not yet reacted to the crashing of the financial world around them. They are not idiots, but San Antonio remains relatively healthy, and almost 2/3 of the companies we currently work with (about 104 at present) saw record years in 2008.

When I talk about inflation, most of them understand it as a broad economic problem. Treasury is printing vast amounts of paper to stimulate the economy. Eventually the currency will devalue to adjust for oversupply, and commodity prices will rise.

But the first inflation to hit your business will result from the financial market meltdown. Financial companies (banks, other lenders, REITs, insurance companies, investment firms) grew over the last 15 years from 6% to 25% of the total market capitalization on the NYSE. Now they are shrinking rapidly, and the impact to your pocket will be swift.

There is a more focused inflation, a cost shifting that applies to small business owners, and it has started already. Your operating expenses are about to rise dramatically, and you should be taking steps to preserve your margins today.

The first hits will come at insurance renewal time. Assuming you are still among the ever-shrinking group of small employers who provide health insurance, that inflationary spiral isn’t about to slow. The medical community has no ability to conserve costs. Providers proudly stick with a philosophy of “whatever it takes,” even though the “whatever” just happens to be the most lucrative choice for them.

With reductions in government payment programs, fewer insured employees and a higher demand for emergency and uncompensated care, do you really expect doctors and hospitals to respond by developing Lean production methods? No, their instinct will be to do as they always have before, to shift the burden to those who still have the money to pay.

In 2000 I predicted that we would see some form of national health insurance by 2011, and that small business owners would lead the campaign to get it passed. I still hold by that prediction.

Property and Casualty premiums have always risen in an inverse relationship with the stock markets. They have been falling for a number of years, as insurers competing for business, and supplemented their earnings with fat portfolio returns. The collapse of their investment income will quickly show up in substantial premium hikes.

Expect the same before the end of this year in Unemployment and Workers’ Compensation insurance. Despite Federal supplements, the insurance funds in each state are depleting fast, and premiums will rise suddenly and dramatically.

All forms of credit are becoming more expensive. Limits on company credit cards are falling, while the interest rates are rising. Spreads are increasing on lines of credit and equipment loans. Higher loan default rates and exploding FDIC insurance premiums are another way that the costs of bad operators are being foisted onto those who were more careful in their decision making.

As a small business owner, you have little choice in paying up for these increases. The interlocking interests of the banks, insurers and government have created a playing field where one requires that you do business with the other. Banks want you to have insurance as a condition of lending. Insurance companies have their profits guaranteed by government regulators, regardless of their investment ability. Other regulators control how the banks lend, and what they should require from you.

So, if you haven’t begun looking through your expenses to figure out where the money for increased insurance and financing costs is to be found, it’s time to start.