Introduction
Sadly, the world we live in today is considered by most to be expensive, from basic amenities such as food, shelter, education and transportation to the cost of doing business. Inflation is gradually taking a toll on various sectors of the country. Some of the issues that businesses face during inflation are; the high cost of power supply, high interest rates, increased cost of materials, decreased consumer purchasing, and most importantly, the decline in currency purchasing power. The reality is that inflation is happening everywhere, so small-business owners need to be prepared for it. It is essential to understand how inflation affects your business and how to devise solutions to manage it.
What is Inflation?
Inflation refers to a broad rise in the prices of goods and services across the economy over time, diminishing purchasing power for both consumers and businesses. It is important to note that inflation is not about how much things cost but how prices change over a given period. Inflation happens when a country’s central bank sets the interest rate too low or increases money growth too rapidly, in other words, it is caused by an increase in the supply of money. Monetary authorities can increase a country’s money supply by:
- Printing and giving away more money to citizens
- Legally devaluing the legal tender currency
- Loaning new money into existence as reserve account credits through the banking system by purchasing government bonds from banks on the secondary market.
Surprisingly, the expectation of inflation itself can further sustain the devaluation of money. Workers may demand higher wages, and businesses may charge higher prices in anticipation of sustained inflation. This, in turn, reinforces the factors that push prices up. Inflation can be classified into three types:
- Demand-pull: demand-pull inflation occurs when the demand for goods and services in the economy exceeds the economy’s ability to produce them.
- Cost-push: cost-push inflation occurs when the rising price of input goods and services increases the price of final goods and services
- Demand-pull: built-in inflation is a type of inflation that results from past events and persists in the present.
Business during Inflation
How does inflation affect your business? Inflation disproportionately affects small businesses because of the battle between limited resources and rising costs. Inflation forces small businesses to use more creative means stay competitive, as they typically can’t fall back on a cash reserve to get through difficult times. The same is the case with executives and corporate leaders who have had to reckon with the effects of inflation, figuring out how to protect margins while paying more for raw materials.
But inflation isn’t all bad. In a healthy economy, annual inflation is typically in the range of two percentage points, which is what economists consider a sign of pricing stability. When inflation is in this range, it can stimulate spending and thus spur demand and productivity when the economy is slowing down and needs a boost. But when inflation begins to surpass wage growth, it can be a warning sign of a struggling economy.
Impact of Inflation on small business
Inflation can be detrimental to business owners in the sense of profit reduction and currency devaluation. Inflation affects every industry differently. How it will impact your business depends partly on what kind of business you are in. For instance, companies with essential offerings, such as grocery stores, will be less affected by inflation than those that provide discretionary ones. After all, food for the foreseeable future, is a necessity regardless of the state of the economy. On the other hand, non-essential purchases like beauty products and entertainment are postponed when wallets are light and budgets are tight. But regardless of what kind of business you own or what industry you’re in, you can typically expect to see some or all of the following during high inflationary periods. Some impacts of inflation on businesses are:
Increased Costs
As inflation increases, so does the cost of everything else including business essentials like materials, transportation, distribution, utilities, and even employee wages. These additional expenses eat into a company’s profits, which can then inflict financial stress on the organization. Businesses unable to absorb the increased costs are forced to raise their prices to maintain their margins.
Disrupted Supply Chains
When the supply of raw materials needed for their products decreases, and the demand for the products remains the same, this shortage of material can cause supply chain disruptions for a company. With fewer goods available, businesses may find themselves paying more for whatever is left, often driving up the price of the finished product as well.
Disgruntled Customers
When businesses increase their prices, they pass these costs on to their customers. This often reduces consumer spending for the product or service and angers some buyers. Some, for example, may get upset that they now have to pay more for the products or services they already use. Others may decide not to purchase them anymore. Like businesses, high inflation rates become a burden for consumers, who struggle to pay for the essentials they need to survive and lead meaningful lives.
Decreased consumer purchasing
As prices rise, people buy less, and this overall effect of dampening consumer demand ripples throughout the economy. But it’s important to note that the effect is not evenly distributed. Some goods, especially essential ones, will see no falloff in demand. Some will see demand rise. But most will see a decrease as consumers reprioritize their spending.
Increased inventory costs
When inflation is high, the cost of everything starts to increase. Rising rents, utilities and employee wages drive up an organization’s overhead costs. When gasoline prices rise, deliveries cost more. All of these rising costs can strain a business, especially one with limited margins.
Tips for dealing with Inflation
Although you can’t control inflation, you have some control over how it affects your business. Here are some strategies to help safeguard your company from rising costs in the months ahead.
Reassess Your Prices
Despite the problems they can cause your business, periods of high inflation are a great time to review your pricing strategy and decide whether to raise prices to match the current inflation rate. Compare your offerings and prices with those of your competitors to see whether a price increase makes sense for your business. Are you offering better quality products or services for a lower cost? If so, your customers may be more than happy to accept your new price because of the value you deliver.
Reevaluate Your Product Offerings or Revenue Streams
As an alternative to raising your prices outright, you may focus on selling goods and services that are more popular with customers or boast higher profit margins. Start by reviewing your offerings and determining which ones have been most profitable for your business.
Outsource Work for Greater Efficiency and Productivity
Most businesses will want to use times of higher inflation to be strategic in how they use their funds. The leaner your operations, the better. In addition to reviewing your pricing strategy and product offerings, think of ways to do more with less in your business. This strategy will keep your business running smoothly, even during rapid price change.
Diversify Your Entire Supply Chain
Don’t rely on just one supplier or vendor for your materials, especially if your business makes most of its revenue from physical products. If you find yourself in this situation, diversify every step of your supply chain. With multiple suppliers, you won’t be disadvantaged if one of them experiences delays or increases its prices. During periods of high inflation, you’ll also put yourself in a better position to bargain with them for lower rates or more favorable terms.
Buy in Bulk Ahead of Time
Increased costs during inflationary periods mean buying the same amount of material will cost you more later. And if supplies run low, you may not be able to purchase them at all. Buying in bulk ensures you can continue manufacturing and selling your products without any issues, potentially giving you a leg up on any competitors that were not so proactive.
Conclusion
This article presents an in-depth examination of how businesses can cope with inflation. It underscores the fact that inflation is a continuous concern for the Nigerian economy and emphasizes the significance of effective policies for businesses to subsist inflation. As prices rise, so, should a company’s readiness to face the changing market head-on and leave their competitors playing catch up.
