Just when I thought we had seen it all, locked down in our homes, waiting for the plague to strike. Then came the Russian-Ukraine war, and now, with the impacts of INFLATION on businesses, no doubt, Hades awaits.
Inflation is when prices rise, but the amount of money people have does not rise to match; when the cost of goods exceeds paychecks.
In the face of inflation – the matter of the moment – manufacturers increase their prices, banks double interest rates, fortune 500 companies empower massive layoffs, etc.
Clearly, inflation hurts businesses. But at its apex, some businesses are more vulnerable than others. Here’s a detailed overview of the impacts of inflation on businesses, plus insightful strategies to help you scale.
How Does Inflation Impact Businesses Globally?
Inflation impacts businesses differently. How inflation affects your business depends on its unique economic circumstances. Consider factors like:
- What industry is my business in?
- How are costs rising (or falling)?
- What’s the productivity level of my workforce?
- What about the nature of my supply chain; are my manufacturers still in play?
- Is my business in debt?
Grocery stores, healthcare providers, childcare and other businesses providing essential goods and services tend to be recession-proof even when inflation hits an all-time high.
On the other hand, restaurants, hotels, housing, tourism, fashion and many other discretionary businesses suffer great losses.
Major Impacts Of Inflation On Businesses Globally
1. Devalues Unit of Currency
In the face of inflation, the value of your trading currency declines. This doesn’t mean that a rupee becomes a little less than 100 paise or that dollar drops to cents. Instead, the purchasing power of your currency decreases relative to other currencies.
For instance, a barrel of oil which, in an economy with low inflation, costs around $70, goes up; you might have to spend a few extra dollars, maybe $5, $10 or even $20, depending on the impact of inflation on your business.
Sadly, once inflation hits, exchange rates going downhill is almost inevitable.
2. Decreases Consumers’ Shopping Habit
Inflation occurs when prices and paychecks go out of balance – rising prices; low salaries. When stuff like this happens, consumers run for cover, looking for ways to buy more with less.
That’s why the higher inflation gets, the lesser consumers spend.
As a business owner, expect consumers’ shopping habits to go down. Some consumers might slash discretionary offerings, such as buying electronics off their budget; others might look for cheaper payment alternatives or switch to lower-priced options.
3. Shortages of Raw Materials
Industries worldwide are facing inflation due to the repercussions of global events – from the coronavirus pandemic to the Russia-Ukraine war. So it’s no news that raw material prices are surging across markets.
For instance, copper & CRGO are facing a never before seen price escalation of 55%, and steel & oil prices are constantly rising.
This high market volatility is undoubtedly testing the resilience and reliability of the global supply chain, making raw materials limited and somewhat more expensive.
4. Increased Interest Rates
Policymakers try to keep inflation in check by monitoring and curbing consumers’ spending habits. That’s why the moment inflation hits, interest rates go up. The idea is to dampen consumers’ animal spirit to risk appetite and spend on only the most essential commodities.
As a business owner, this can impact you in two ways. First, you won’t be able to get any low-interest loans; second, consumers will frown and might even walk away the moment you raise your prices.
5. Increased Overheard and Inventory Cost
A common impact of inflation on businesses is increased rents, utilities, and employee wages. Little by little, the overhead cost of running your business doubles.
But that’s not all; the annoying part is that, depending on the effect of inflation on your business, the quality and value of stock items you hold in your inventory can drop to an extent even the raw materials awaiting production begin to exaggerate in price.
6. Benefits Exporters; Harms Importers
Once a nation’s currency declines which is a constant in the face of inflation – goods become more affordable when priced in the currency of a foreign nation.
Inflation might be a good thing if you’re in the exporting business. However, importers will have to face the other edge of the sword. Foreign-made goods will become more expensive, and the value of their trading currency will, in most cases, be no match for it.
7. Time and Resources Spent on Research and Development Increases (R&D)
One significant impact of inflation on businesses is that it breeds uncertainty. When prices go up, everyone tries to become extra careful about their decision.
Investors want to be 99.9% sure that an investment is worth the effort, so the pressure gets passed on – everyone must account for the effects of generally rising prices in their buying, selling, and planning decisions.
Indeed, this increases the time and resources spent researching, estimating, and adjusting business behaviour.
8. Erodes the Value of Assets Held in Home Currency
Businesses affected by inflation the most are those with assets in their home currency, cash or bonds.
Price increase gradually reduces the purchasing power of such assets and might require that you shell out more money or risk losing an ample sum of your investment.
9. Imbalance in Supply and Demand
Inflation brings about increased prices, a steady decline in sales, and many disgruntled customers. But worst of all, it creates an imbalance in supply and demand. And when this happens, one of these two scenarios plays out.
It is either wholesale businesses affected by inflation won’t be able to provide as many goods and services as they once did, or consumers will stop demanding. In any case, inflation puts the overall profitability of your business at risk.
Trusted Strategies to Curb Inflation
This might make you wonder if inflation is a good or bad thing. Well, one thing is obvious, inflation is a constant, so instead of dwelling on the negatives, why not solicit a valuable strategy?
1. Secure Business Funding Early
The immediate impact of inflation on business is rising prices. While some consumers are not helpless and can easily cope, the struggle to meet demands and supply is nerve-racking.
But what if there is a way to prepare ahead of time?
Instead of waiting to be recorded as one of the businesses affected by inflation before borrowing money, you’ll probably have to pay back through your nose and apply for fixed-rate loans now. Interest rates will remain the same even in the face of inflation.
2. Diversify Your Supply Chain
What’s your supply chain like? Do you rely on a single manufacturer to handle all your needs? If YES, now is a good time to diversify and make new friends.
Building good relationships with multiple manufacturers is the least you can do to fight the impacts of inflation on your business. This way, you’re sure you can provide cheaper alternatives for loyal customers regardless of how high inflation gets.
3. Outsource Work
The world is a global village. There is no hard and fast rule that you must work with people in your immediate region. If your business is affected by inflation, you can look to the freelance market for cheaper alternatives to immediate problems.
Note that this goes both ways. Outsourcing work for better efficiency doesn’t have to be a thing only when there’s a price hike in your region. In the face of a booming economy, you can outsource work to people in countries affected by inflation.
Consumer prices rising as manufacturers pass on higher costs doesn’t necessarily make inflation bad, i.e. for forward-looking businesses.
There’re lots of ways you can profit from inflation and reduce its impacts on your business. Investments in commodities like gold, real estate, mortgage-backed securities, etc., can help you build an inflation-proof business.
However, as Robert Arnott says, “In investing, what is comfortable is rarely profitable.” thread wisely.