Ever since the COVID-19 pandemic, the economy is struggling with new challenges. Even when we are witnessing a post-pandemic era now, the inflation figures are keeping things worse for businesses.
The Consumer Price Index (CPI), which measures the average change in price over time on a wide range of services and goods used by the average American, rose to a whopping 7.9% for the 12-months period ended in Feb 2022. It’s the highest rate that is ever recorded since Jan 1982, as per the statistics of the Bureau of Labor Statistics (BLS).
Whenever inflation increases, it becomes the greatest concern for businesses, especially small and medium-scaled businesses because it impacts their profits, purchasing power, and investments. Considering the current record surge in inflation and even further expected surge, it is not possible for businesses to survive without taking protection measures. Therefore, this article will shed light on inflation and then discuss some of the effective ways to protect the business from high inflation.
Inflation – A Brief Overview
Inflation is a measure of the rate of increase of services and goods prices in an economy. It reflects the decline in the purchasing power of people on a specific currency over time. There are two common types of inflation:
- Demand-Pull Inflation: It is the inflation type that is caused by increased demand for services and goods compared to production ability.
- Cost-Push Inflation: It is the inflation type that is caused by increased final price due to the rising price of input services and goods.
Mostly inflation goes high when there is a mismatch between supply and demand. Other than impacting the purchasing power of the general public, inflation also impacts businesses’ sales, profit margins, and growth possibilities.
Why Inflation is Increasing Aggressively?
Over the past few months, the whole world is experiencing an aggressive increase in inflation. Inflation is breaking decades-old records and it is just getting worse with every passing month. Owing to all that, consumers are witnessing price hike in a lot of services and goods. So, the question is why inflation is increasing aggressively?
One of the main reasons behind the spike in inflation is the continuous increase in energy prices and the demand-supply pressure due to the reopening of economies after the pandemic. Moreover, the Russia-Ukraine conflict is also impacting the oil prices, which is further contributing to the inflation spike.
How Does Inflation Impact Businesses?
Inflation is one of the biggest concerns of businesses at present time. A small spike in inflation is enough to disrupt the financial plan of any business, especially for small and medium-scaled businesses. Some of the ways inflation impacts businesses include:
- It demands to increase the cost of services and products.
- It forces the workforce (employees) to ask for paycheck rises. Failing to do so results in resignations or unsatisfied workers.
- It causes a significant drop in profitability.
- It increases the cost of new debt, as the interest rate also gets increased with inflation.
- It decreases the overall purchasing power, causing supply chain and similar other inventory-related issues.
Large or reputed businesses can fight well with inflation by quickly increasing the price of their services or products. However, small and medium-scale businesses have to think a lot before increasing the price due to market competition. Therefore, they should focus on other possible ways to protect their business from high inflation.
5 Ways to Protect Your Business from High Inflation
Inflation casts its impacts everywhere. From consumers to businesses to governments, everyone experiences the effects of inflation. The best way to tackle high inflation for your business is to evaluate what options you have to minimize its impacts without compromising your service quality and user experience. From this perspective, here are the 5 ways to protect your business from high inflation:
1. Target Long-Term Agreements
As there are concerns that inflation will keep its upward trend, another effective way to protect your business is to opt for long-term agreements wherever you could. For example, you can go for a long-term settlement with your supplier. Similarly, you can negotiate a long-term lease with a gradual increase with your landlord. Alternatively, if you cannot succeed in long-term agreements, you can at least negotiate with your suppliers, landlords, and other parties for better pricing or bulk discounts. Overall, all these agreements will let you have a clear picture of the fixed expenses you have to manage, giving you more room for planning and reducing uncertainties.
2. Investment in Technology
This is the technologically advanced era, which demands more investment around technology to double the work and reduce the cost. With the right set of technologies, you can reduce your workforce and get work done much faster at a much lower cost. For example, you can invest in robotics, barcode systems to manage inventory, AI-driven customer support, and similar other technologies to have an efficient and cost-effective system in place.
3. Strategic Price Increase
If you cannot increase the price of your services and products instantly, then you should opt for the strategic price increase. You should pick those services/products that are most affected by the inflation and where consumers can bear the increased cost. Alternatively, you can practice “shrinkflation”, which implies delivering fewer services/products for the same old price.
4. Invest in Inventory, Stocks, Property, and Commodities
It is not the right strategy to just wait for the prices to rise and then worry about business revenue. The smart businessmen who have access to capital or bank loans, keep purchasing and stocking the inventory items to avoid paying hefty prices afterward. Similarly, you should also grow your revenue by investing in stocks, property, commodities, and other investment places. When you have extra cash inflows, you can handle rising inflation and business expenses effectively.
5. Energy Audit
Energy is mostly the first and fastest to influence financial burden businesses witness with the rise of inflation. Therefore, you should execute a thorough energy audit and fix things accordingly. For example, you can perform maintenance of your cooling/heating systems, install renewable energy sources, and similar other measures to help reduce your energy expenses.
Inflation has already broken decades-old records, but there are no signs of its slowing down. Plus, the Russia-Ukraine conflict has further supported the upward growth of inflation. In such situations, it makes sense to act smart and focus on strategies that can help your business deal with inflation in the longer run. Other than following the above 5 strategies, you should also explore other ways that can turn more fruitful for your business model.