When the effect of inflation is mentioned in the news, misunderstanding and speculative thinking frequently accompany it. Everyone is aware that inflation results in higher pricing. The transparency surrounding inflation usually ends there, though. Even though those “rising prices” are a national average, how inflation affects a specific business will depend on its particular economic circumstances, including the industry it belongs to, how its typical costs are changing (or staying the same), the productivity of its workforce, the structure of its supply chain, the amount and type of debt it has (if any), and so on. As a result, generic advice on the effect of inflation on small firms may seem conflicting and unclear.
But being able to prepare for and adjust your firm for inflationary trends effectively can be quite beneficial. Making wise decisions might help a business not only survive inflation but also grow stronger as a result. Here, the blog discusses the effect of inflation on startups and midsize businesses and how to handle it properly.
What Is the Effect of Inflation?
Inflation is a general price increase without a corresponding improvement in the standard of living. The CPI is often used to measure this at the consumer level, although businesses experience the consequences of inflation before consumers do. This effect of inflation should be understood properly, at first to manage it. Familiar repercussions of inflation include a lack of raw materials, rising prices for goods and services, consumers who cannot afford these items, a rush to buy commodities out of concern for shortages or price hikes, and more. For managers and business owners, the inflation uncertainty makes it difficult to make strategic business forecasts.
How Can Inflation Impact Startups and Midsize Businesses?
Your specific situation will determine the economic effect of inflation on your organization. Particular industries are more, and some are less under cost pressure. You may experience some or all of the following inflation effects depending on your business model and industry.
1. Shortages in the supply Chain
Businesses frequently run out of inventory or cannot transport items quickly enough to meet client deadlines because demand outpaces supply.
2. Labor Shortages, High Employee Turnover & Rising Wages
Employees become increasingly wage-sensitive as costs rise and unemployment declines. As an illustration, working parents can decide they don’t make enough money to pay for daycare and quit their jobs, worsening the labor shortage.
As the cost of living continues to climb, employers discover that employees are less willing to work for low pay.
3. Cost of Raw Materials Rises
As suppliers raise prices to ration a limited supply, inflation drives up the cost of raw materials. These price hikes can occasionally be seen as surcharges, shrinkflation, expedited fees, or contract renegotiations. Increased inventory costs are frequently the result of hoarding rare products.
How Has Inflation Affected Businesses in Recent Times?
The National Federation of Independent Businesses (NFIB) reported that 26% of respondents listed inflation as their worst worry, more than any other, in its February 2022 survey of small business owners. (The second choice, made by 22% of respondents, was the caliber of the workers.) Only 2% of respondents to the study one year prior cited inflation as their top issue.
During the ensuing year, inflation rose sharply. The COVID-19 pandemic shut the economy down for several months, allowing people to save money. Economists like to say that there was too much money chasing too few things when the economy reopened. It is anticipated that this imbalance will eventually correct itself, but in the meantime, inflation has already persisted longer than expected. The economy’s future course is now unknown due to the Fed hiking interest rates to battle inflation.
How to Protect Your Business From Inflation?
Worry and uncertainty frequently accompany inflationary periods. The procedures necessary to survive such a turbulent time and emerge stronger, more effective and productive can be started in advance by a corporation that has planned ahead. Regardless of how well or poorly your company is positioned to withstand inflation, there are a few sound strategies that everyone may do to protect themselves from the inflationary spiral.
1. Settle Transactions
The effects of inflation on buyers and sellers are different. As a result, if you are the seller, shorten your credit cycle. Your goal should be to get paid as quickly as you can because the worth of your credit will decline over time. If you are the buyer, this varies. So settle transactions immediately because the more you wait, the more expensive the identical goods can be later. A long-term credit agreement with your bank will make it simpler to pay off your loan later, thanks to rising income from inflation.
2. Preserve Money
Even new enterprises that are conservative always have some cash on hand. You will need to find a way to preserve your money if inflation takes a serious turn for the worse. The best choices are short-term treasuries, inflation-protected securities, or treasuries that will increase or decrease your principal in accordance with the inflation rate.
3. Sell Internationally
This should be beneficial for you because inflation is typically correlated with a depreciation of your home currency. If you sell to someone whose currency depreciates at home, there can be a problem. A trustworthy currency may be preferable, such as the US dollar, Euro, Japanese Yen, or Swiss Franc.
How Can You Profit From Inflation?
While many economists believe the early 2020s’ high inflation was temporary, they do not anticipate it to disappear overnight. The Federal Reserve Bank of Philadelphia reported that the collective assessment of 36 expert economic forecasters polled during the first quarter of 2022 was that inflation, as measured by the Consumer Price Index, would average 5.5% in that quarter (CPI). The long-term inflation rate from 2022 to 2031 is expected to be 2.5%, 25% higher than the Fed’s target of 2%. Businesses must be prepared since more inflation is on the horizon.
1. Strategic Product And Service Price Adjustments
Inflationary periods present possibilities for altering the pricing strategies of rivals. For instance, by maintaining current prices, a company will automatically “reduce their prices” compared to competitors. This increases the cost-competitiveness of your company and could increase revenue. This is an excellent option if you recently increased capacity or reduced expenses through automation.
The overall inflationary environment helps lessen such changes’ impact on the end customer. On the other hand, businesses trying to position themselves as a premium good or service can double down on price increases during inflationary periods. When changing prices, conduct strategic business forecasting to increase your company’s profitability.
2. Invest in Automation
It’s a good idea to borrow money and invest in the automation when there is inflation. With automation lowering expenses and rising inflation lowering the real interest rate paid on loans, you can retain profits and boost scalability.
3. Market And Sell Alternatives
Customers are more open to experimenting with other items when there is a supply shortage. A competent financial planning team can assist you in moving fast to maximize the profitability and scalability of new goods. New product development comes with a variety of budgeting and forecasting problems.
4. Create a Specific Inflation Plan For Your Small Business
The appropriate inflation strategy for your company depends on its positioning, industry, and resource base. A corporation with a track record of consistent profitability might be sensible to invest in automation. Still, a startup with an unstable customer base shouldn’t take the chance of overinvesting in capacity. Young businesses should leverage their adaptability by changing their pricing and marketing strategies.
When prices increase, and money’s purchasing power decreases, inflation results. Raising pricing, reducing expenses, reevaluating company processes, and altering supply strategies are just a few choices for businesses to deal with inflation. There are positive aspects to inflation. Many companies can emerge from an inflationary phase stronger than when they first entered it. At least for the near future, inflation will continue to be high. The economic environment will shift significantly. As a result, forcing enterprises to adjust.
1. Does inflation have an equal impact on all businesses?
Not all businesses are impacted by inflation in the same way. More often than not, non-essential goods and services are affected. The impact of inflation differs significantly among industries. Price increases won’t affect demand as much as they would for an optional good when customers depend on a company and are, by choice or circumstance, less eager to shop around. As a result, numerous industries, including those in grocery stores, healthcare, daycare, and tax preparation, are seen as recession-proof. However, with discretionary items, a purchase that can wait until the following month or longer most often will.
2. What are the positive effects of inflation?
Despite all the grim predictions, inflation may also positively affect a firm. Time, money, and the workforce disruption that frequently follows unstable economic periods can be saved by understanding how to turn the warning indicators of an impending inflationary era into benefits.
Some of the positive effects of inflation include:
- Revenue grows when prices rise.
- Decrease in unemployment (in some cases).
- The margins increase for the current inventory.
- It can reduce the cost of old debt.
3. What are the adverse effects of inflation on businesses?
Even though it’s right at the top of the list, inflation can have serious negative consequences for a firm that isn’t all as evident as “everything costs more.” Buyers’ emotional responses to rising inflation cause many inflation effects, and they are not always predicted.
Some of the adverse effects of inflation are:
- A rise in the price of raw commodities.
- Disturbances to the supply chain.
- Inventory expenses and overhead increase.
- Reduced consumer spending and higher rates of interest.
- Consequences of foreign exchange.
- Reduced growth and employment.
- Price increases are transferred.