With the potential threat of inflation beginning to creep into business life, how are small businesses meant to prepare for the onslaught of inflation that seems almost inevitable? For a lot of new start-ups or SMEs it can be an unnerving time for owners, as creating a strategy to absorb the cost of inflation can be difficult. Although inflation might not directly affect the market of your business, indirectly it will have an effect on the business somewhere. There are some things which can be done to help deal with the problems of an inflating market, strategies need to be put in place as inflation can impact the stability of a business and its productivity.
For a business to get through a tough patch, it’s important to stick together, stay strong and fight to remain competitive.
How does inflation affect business?
Inflation normally affects everyone. Other businesses, commodities, wages, suppliers, customer sales. As one becomes effected, it will have a knock on to the others and normally customers end up taking the brunt of inflation. If a business has to pay more for things such as rent, supplies or wages, most will have the natural reaction of increasing prices.
For most businesses, the brunt of inflation will come through leasing costs, utilities, supplies and staff wages. However, it always depends on what kind of business it is. For example, if there is a rise in the cost of food produce, it will primarily only effect, restaurants, café’s, hotels and supermarkets. However, supermarkets can normally handle this inflation better, without passing the cost onto customers. With a larger business, they can change productivity levels more easily, altering lines of production. A restaurant might already be operating at full tilt and don’t have the ability to make any inhouse changes to absorb inflation costs, so normally they would pass the costs on to customers.
Sometimes, it’s simply not possible to avoid an increase in prices. However, if competitors are doing similar things it remains easier for businesses to stay price competitive. Although a large rise in inflation generally drives away custom, if everybody in the market is doing it, then customers normally have no choice but to take the brunt of that cost.
How can you plan for inflation?
Planning for inflation is a difficult task. You can’t always see it coming and normally it’s out of your control. There’s not much you can do to stop inflation, but there are a couple of things you can to remain competitive in the market.
If hit by inflation, the only one thing you can really do is assess the current situation and try to work out how to prepare for the future. You need to see where you can either improve any areas of the business, or potentially what areas are dead weight. Check productivity levels and see if there are ways you can save money here, even if that means investing for the long term.
How to react :
A business must first go back to their cash flow forecast and see the impact inflation will have. What will it mean to the operating costs of the business? How much will these increase? The business then needs to see how much profit it will be making and if necessary where it can either drop outgoings, or increase productivity.
If a business has procedures in place to help deal with inflation, then normally you can come through the difficult times. However, if the business is not prepared owners may need to take a step back and think about the best options moving forward. If finance is tight, then it’s important to think about a financing facility.
This might mean taking out additional funds to improve equipment and make some of your production methods more efficient, or simply improving some of your business processes. These are investments for the future and if they make the running of the business easier, they could reduce the larger impact of inflation.
Additional funds could come through the use of invoice financing, business overdrafts or even bank loans. If there is nothing wrong with the business and you simply need the extra finances to help cover the rise of inflation, then additional sources of cash can prove to be that extra boost you need.
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