How Does Inflation Affect My Business?
When the idea of inflation is being mentioned nearly everywhere you turn, fear and confusion inherently follow. While many know that inflation means rising costs, they may not be fully aware of what it means for their business. It’s important to note that inflation can have significant and varying impacts on companies both large and small.
As an owner or manager of a business, you need to know how inflation works and how you can prepare your company for it.
What does inflation mean to organizations?
There are a few general implications that many businesses will have to deal with at some point:
- Costs: Inflationary pressure tends to increase the cost of goods and services over time. This means that your company will eventually have to pay more for the same products and services it purchases now.
- Revenue: You may have to charge higher prices for your company’s products and services. While this may initially boost revenue, it can also lead to lower demand as consumers’ disposable income decreases.
- Interest rates: As inflation rises, so do interest rates. This can impact your company in two ways: first, it will cost more to borrow money; and second, higher interest rates can lead to lower consumer spending, which can hurt sales.
- Profit margins: Inflationary pressure can eat into your company’s profits if your business pays more for goods and services but cannot raise prices without losing customers. On the positive side, inflation can lead to increased profits as consumers are generally more willing to accept a price increase in an inflationary environment. Additionally, some companies may see an increase in demand as consumers make more practical decisions and look for better price value (buying a Chevy over a Cadillac for example).
Are all businesses affected equally?
How inflation affects your business will depend heavily on your industry and how its costs are rising (or falling), the productivity of your workforce, the nature of your supply chain, the level and type of your debt (if any), and more.
In general, companies that have a lot of costs that increase with inflation (such as labor or raw materials) will be more impacted than those whose costs remain relatively stable. Additionally, businesses that can pass on price increases to customers will be less affected than those that cannot.
Which industries are typically less impacted?
Essential goods and services: As prices rise, consumers will still need to purchase these items and may be willing to pay more for them. Additionally, businesses that produce goods or provide services that are in high demand may benefit from inflation. As prices increase, demand for these items may also increase, leading to higher profits.
Markets with few sellers: Due to high prices, there are fewer businesses that can compete, and those that remain may be able to charge more for their products. Moreover, in markets with few sellers, companies may have more negotiating power when it comes to prices.
Businesses with a loyal customer base: During times of increased prices, customers may be less likely to switch to a competitor. On top of that, companies with a loyal customer base may be able to negotiate for higher prices.
How to prepare your company for inflation:
The best thing you can do to combat inflation is to prepare yourself and your organization. There are a few key things that we believe every company should consider:
- Review your actuals and budget regularly: This will help you identify areas where costs are rising so you can adjust accordingly. Also, ensure you have a realistic budget in place that considers the possibility of rising costs.
- Plan for higher interest rates: If you know that interest rates are going to rise, factor this into your budget and business plans.
- Borrow early and at fixed rates: As interest rates continue to rise consider switching any adjustable-rate debts to fixed loans.
- Pricing: Review your pricing regularly to make sure you are not losing out on profits due to inflationary pressures on your costs including salaries, raw materials, etc.
- Suppliers: Work with your suppliers to ensure that you are getting the best possible price for goods and services. You can also consider diversifying your suppliers to avoid relying solely on one. This is a great time to shop the market to ensure you are getting value and that your vendor isn’t taking advantage of the situation.
Inflation is something that all organizations need to be aware of. While it can have positive effects, in general, it presents many difficult challenges for companies. If you are concerned about inflation or unsure of what steps you should be taking to prepare, take the time to speak to an experienced financial expert who can answer your industry-specific questions in more detail. You will also be able to create an effective strategy that aligns with your individual business goals.
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