Inflation is causing businesses and households a lot of pain in 2022. Inflation is high all over the world due to a number of reasons like pandemic disruptions, monetary stimulus and supply-chain problems.
As such, the high inflation makes it harder for companies to plan and invest. At a macro level, it may be linked to economic downturns, resulting in reduced consumer spending. In severe cases, high inflation can cause companies to keep their inventory longer, hoping that prices will go up in the next few days.
High inflation can impact your business in three ways.
You Also Need to Raise Your Prices
As inflation makes it more expensive for you to operate, you’ll also need to raise the pricing of your products or services. This is a tough decision and conversation to have, but it’s one that you’re more likely to win now that prices are rising in almost every industry.
If you’re unsure how to adjust your prices to keep up with inflation or maintain your margins, you can always contact a professional to help you figure out the right price point for your business.
Reduction of Purchasing Power
As inflation causes prices to rise, purchasing power is lowered. For business owners, this manifests in higher supplier costs. Materials, transport, office supplies, and utilities have become more expensive.
Your staff are also probably asking for pay rises to keep up with inflation. To achieve that could mean a substantial wage bill increase for your business.
Increase in Interest Rates
To keep inflation at a sustainable level, central banks raise interest rates when inflation is high. This slows the economy and prevents inflation from getting out of control. As a business owner, you’ll see this reflected in a higher cost of borrowing. The same will apply to your home loan.
Inflation can have some benefits to your business. For example, it can increase the value of your business’s expensive assets, like property or equipment. Additionally, it can make debts seem smaller in comparison – even though the debt amount stays the same, your income is hopefully rising.
How to Tackle Inflation
Different businesses have different abilities to keep their customers from feeling the effects of inflation caused by cost increases.
More prominent companies can use hedges to cover the cost of important materials, and they can afford to keep prices stable when costs go up and down in cycles.
On the other hand, it is harder for small businesses that don’t have many financial resources, especially if their main cost is labour from people with skills that are in high demand and can get raises to keep up with inflation. Those workers can’t be stockpiled in advance.
Firms with solid brands usually keep their key product prices constant, especially when consumers are already familiar with them. The “list price” might be used to compare the company’s prices to its competitors. If the list price fluctuates, it might confuse consumers about the brand, significantly when the cost is usually associated with quality.
Conclusion
Inflation can have negative effects by raising the costs of nearly everything. However, depending on the size and type of business you have, the key points mentioned in this article will help you understand what it means to your business and how to navigate through it.
Are you worried about managing your business finances through high inflation? Accountants247 Golders Green offers a wide range of accountancy services to help you. We have years of experience through many economic cycles, including previous periods of high inflation.
