“Regardless of how you look at it, inflation is going to be with us for a good period of time,” explains Joe Brusuelas, chief economist at RSM, a global accounting and finance firm.
There is no question that many companies are now bracing for inflation issues, but what’s the reason? Continued supply chain challenges, strong consumer demand, and the lingering pandemic will inevitably prolong rising prices in 2022, likely prompting inflation to become a serious economic problem.
In fact, 2020 prices—including rental, new, and used cars, as well as food—rose at their fastest pace in about 40 years. As a result, inflation is emerging as a serious economic concern as we move through 2022.
In order to grasp how inflation will affect your business, it is important to understand exactly what inflation is, how it impacts businesses, and how to manage the repercussions.
What is Inflation?
According to the Federal Reserve, inflation is the increase in the prices of goods and services over time. Inflation also involves the reduction in the value of a dollar. Because products and services get more expensive, people, in turn, tend to buy less.
The Federal Reserve considers an annual inflation rate of two percent to be ideal as a way to meet employment and price stability targets. However, a rate of more than two percent can cause problems. And as of May 2021, inflation rates were at five percent.
One culprit is the COVID-19 pandemic. During the stay-at-home order in 2020, most of our lives came to a drastic halt. People were not leaving their homes, they were not buying any goods, factories were not producing anything, and businesses were not selling.
Once vaccines became available, the economy began to rebound, people received stimulus checks, and shopping resumed. While the demand for products hit the roof quickly, factories could not get up to speed fast enough, so too many buyers were fighting for too few products.
This cycle caused raw material prices to skyrocket, which caused the prices of products to also skyrocket. And this equates to inflation—which we experience in the high cost of many products, including home furnishings and new, used, and rental cars.
How does Inflation Affect Businesses?
Because everything is more costly, inflation can make it very expensive to run a business. For example, raw materials and supplies are expensive, numerous items are not available, employee costs are greater, and shipping costs have skyrocketed. In addition, when inflation increases, banks and lenders have no choice but to charge customers more.
How can Businesses Survive Inflation?
It is important for small businesses to protect themselves from the negative effects of inflation. Below, we offer several suggestions:
Invest in yourself: According to billionaire Warren Buffet, tackling inflation involves “investing in yourself and being the best at what you do.” Buffet suggests being prepared for the effects of inflation by learning to limit your expenses, and understanding your finances, as well as the market.
Think about pricing: Consider how you can increase your prices. If you are not able to do this, consider diversifying your offerings. But always keep an eye on your competitors to ensure you do not end up with overpriced products that lead to business loss.
Reduce expenses: Think about ways to reduce non-essential costs and economize. Contemplate improving all processes and reducing waste in order to save money.
Increase sales: Focus on your existing customers. In fact, according to Forbes, marketing to new customers costs five times more than retaining existing customers. As a result, try to concentrate on increasing sales to your existing customers.
Invest in your business: It is important to plan ahead. Think about what your cash needs will be down the road and act now. Apply for a business loan or start saving money. This will help you prepare for what’s around the corner.
Reduce debt: Remaining financially flexible is vital. To do this, consolidate debt, pay off creditors, and keep cash on hand.
Stay lean: Consolidate business units and closely examine business processes.
While inflation can lead to increased costs and decreased profits, there are many ways to manage inflation and weather the storm. The key is for business owners to understand inflation and plan for it before it begins to negatively affect your business.
At NCH, we understand that it may seem difficult to start your business when inflation is on the rise. However, we’re here to alleviate the stress of launching your business during market fluctuations. We can answer your questions and provide you with all the tools your business needs to succeed in any economic climate. Call us today at 1-800-508-1729 to learn more about the advantages of forming your business with NCH!