With the possibility of inflation creeping around the corner of the business world, it can be an unnerving time for business owners alike. It can be extremely hard to predict inflation, but perhaps more importantly it can be incredibly difficult to cope with the impacts of inflation on a business. Inflation can have a big impact on the sustainability of a business, as it normally effects the long-term processes, destabilising what has already got them there.
How Does Inflation Effect Business?
Inflation can affect a business in many different ways, but generally as the price of something within the market goes up, it has a knock-on effect meaning businesses pay more, so they in turn increase their own prices. With customers normally taking the brunt of inflation, they might be put off by price increases and therefore decide to spend their money elsewhere.
For large businesses and corporations, they are sometimes able to spread the cost of inflation through economies of scale and absorb it. However, for smaller businesses, they normally have no other choice but to filter the cost down to customers. It might be that supplies for the business have gone up meaning it costs more to produce certain products. Or it might just simply be an increase in commodities, utilities or wages might have gone up, increasing the costs of running the business.
These effects will all mean that outgoing costs are higher and will naturally reduce profit margins. The first response for most businesses is to pass this on to the customers and rise their prices, but sometimes this isn’t the most effective way of dealing with inflation.
What can you do?
Normally these things will be out of the control of the business. It might not even be directly in the market of the business, just an increase in certain commodities. It could be that another business you rely on is hit by inflation. The key to dealing with the problem is by first assessing your options. It’s important to remain price competitive but it’s normally bad news when a business has to filter costs down to customers.
If the inflation is coming through an increase in supplies, then the production method itself needs to be assessed and analysed. Is there anyway the production methods can be improved, reducing the overall cost and effect of inflation. Alternatively, the business has to look at where it can make cut backs, where can it save money to avoid hiking up the price of its products. This might even mean borrowing money, or dipping into reserves to invest in better machinery or a more cost-effective method of production.
How Can You React?
If a business has procedures in place to deal with inflation issues, then normally it would be able to come through the hard times relatively unscathed. However, if a business isn’t prepared owners might need to take a step back and think about a financing facility.
This could mean taking out additional funds to improve equipment and make production methods more efficient, or perhaps improving businesses processes. These should be considered as investments for the future and if it makes running the business easier it might even reduce the greater impact of inflation.
These additional funds could come through using invoice financing, business overdrafts or even bank loans. It might be a case that any extra finances could give the business that extra boost and cover any necessary costs of inflation meaning it doesn’t have to be passed on to customers.