The economy has been facing new hurdles since the COVID-19 outbreak. Even though we are now in a post-pandemic age, inflation rates continue to make matters worse for businesses.
For the 12-month period ending in February 2022, the Consumer Price Index (CPI), which measures the average rise in price overtime on a wide range of services and goods used by the ordinary American, increased by a whopping 7.9%. According to Bureau of Labor Statistics data, this is the highest rate ever reported since January 1982. (BLS).
Inflation is a major source of concern for businesses, particularly small and medium-sized businesses because it has an influence on their profitability, purchasing power, and investments. It is impossible for businesses to survive without taking precautionary steps, given the current record high in inflation and the likelihood of an even higher rise. As a result, the focus of this essay will be on inflation, followed by a discussion of some of the most effective techniques to protect businesses against excessive inflation.
A Quick Overview of Inflation
Inflation is a measurement of the rate at which the price of services and goods in a given economy rises. It reflects the erosion of people’s purchasing power in a given currency over time. Inflation can be classified into two types:
Demand-Pull Inflation: This is the form of inflation that occurs when demand for services and goods exceeds production capacity.
Cost-Push Inflation: This is the sort of inflation that is generated by an increase in the final price as a result of rising input prices for services and goods.
When there is a mismatch between supply and demand, inflation rises. Inflation affects firms’ sales, profit margins, and growth opportunities in addition to the general public’s purchasing power.
Why is Inflation Increasing So Quickly?
Inflation has been rising rapidly over the world in recent months. Inflation is smashing all-time highs, and it’s only getting worse with each passing month. As a result of all of this, customers are seeing price increases in a variety of services and items. So, what is the reason for the rapid rise in inflation?
The continual rise in energy prices, as well as the demand-supply strain caused by the reopening of economies following the epidemic, are two of the key causes of inflation. Furthermore, the Russia-Ukraine conflict is having an impact on oil prices, which is adding to the inflationary trend.
What Effect Does Inflation Have on Businesses?
Inflation is currently one of the most pressing challenges for businesses. A slight increase in inflation can throw any business’s financial strategy off, especially small and medium-sized firms. Inflation has an influence on firms in a variety of ways, including:
- It requests that the price of services and products be raised.
- It forces the workforce (workers) to demand raises in wages. Failure to do so leads to resignations or dissatisfied employees.
- Profitability suffers significantly as a result.
- It raises the cost of additional debt by increasing the interest rate, which rises in tandem with inflation.
- It lowers total purchasing power, resulting in supply chain and other inventory-related problems.
Large or well-known companies can effectively combat inflation by rapidly raising the price of their services or products. On the other hand, small and medium-sized enterprises must consider their options carefully before raising prices in response to market competition. As a result, they should concentrate on other options for protecting their firm against rising inflation.
5 Ways to Prevent High Inflation in Your Business
Inflation has a wide range of effects. Inflation has an impact on everyone, from consumers to corporations to governments. The best method to deal with excessive inflation in your organization is to assess your choices for minimizing its effects while maintaining service quality and user experience. Here are five strategies to defend your business from excessive inflation from this perspective:
1. Targeted Long-Term Contracts
Given the likelihood that inflation will continue to rise, opting for long-term agreements wherever possible is another excellent method to protect your organization. You may, for example, negotiate a long-term contract with your supplier. Similarly, you and your landlord can work out a long-term lease with a progressive increase in rent. If you are unable to reach long-term agreements, you can at least negotiate better pricing or bulk discounts with your suppliers, landlords, and other partners. Overall, all of these agreements will provide you with a clear view of the fixed expenses you must manage, allowing you to plan ahead and reduce risk.
2. Technology Investment
This is a technologically advanced era, which necessitates greater investment in technology in order to double productivity and lower costs. You may cut your labor and get work done considerably faster and at a lesser cost with the proper collection of technology. For example, to have an efficient and cost-effective system in place, you can invest in robotics, barcode systems to monitor inventory, AI-driven customer assistance, and other comparable technology.
3. Increase in Price in a Strategic Way
If you can’t immediately raise the price of your services or products, you should consider a smart price rise. Choose the services/products that are most affected by inflation and where consumers are willing to pay more. You might also perform “shrinkflation,” which is providing fewer services/products for the same price.
4. Invest in Inventory, Stocks, Real Estate, and Commodities, Among Other Things
Waiting for prices to rise and then worrying about business revenue is not the best plan. Smart businessmen with access to finance or bank loans continue to buy and stock inventory items to avoid paying exorbitant costs later. Similarly, you should increase your earnings by investing in stocks, real estate, commodities, and other financial instruments. You can efficiently handle growing inflation and business expenses when you have extra cash inflows.
5. Audit of Energy Use
When it comes to the financial burden that businesses face as a result of rising inflation, energy is usually the first and quickest to influence it. As a result, you should conduct a comprehensive energy audit and make necessary adjustments. You can, for example, lower your energy costs by maintaining your cooling and heating systems, installing renewable energy sources, and doing other comparable steps.
Inflation has already shattered decades-old records, and there are no signs that it will slow down any time soon. In addition, the conflict between Russia and Ukraine has aided inflation’s rise. In such circumstances, it’s prudent to think ahead and focus on tactics that will assist your company manages with inflation in the long run. Aside from the five techniques listed above, you should look into other options that may be more beneficial to your business strategy.