Inflation. What Is It? And How Will It Affect Your Business?

What is inflation, and how will it affect your business? Is there a way you can fight back? Keep reading…

You can’t go an hour at the moment without inflation being mentioned somewhere. In the papers, on the tv, in conversation at a dinner party… There are financial advisors telling you how to beat it, business owners complaining it’s crippling them, and politicians arguing about what the true rate of inflation actually is. But what is it, really?

Inflation is the hidden tax that affects us all – but I am here to teach you some ways to protect yourself from it, and even benefit from it. Before we get into the good stuff, let’s have a quick recap on what inflation actually is.

In simple terms, inflation is the rising of prices over time. Or looked at another way, it’s the decline of purchasing power. I.e. the things you want to buy are costing you more, but the money you’re buying them with isn’t increasing at the same rate.

In short, the higher the inflation, the more your money loses value over time. Most economists argue that a small amount of inflation is healthy because it encourages people to spend and invest their money, rather than stashing it under the mattress and waiting as it decreases in value. Personally, I think this is a BS argument and an excuse used by politicians and economists when they’re unable to control inflation and need a way to justify it. As I said at the beginning of this, inflation is basically a secret tax. So as a consumer, why would we ever think inflation is a good thing?!

The high levels of inflation we’re currently experiencing in the UK (around 10% at the time of writing), are having a detrimental impact on the economy, and a crippling effect on the public and businesses. As prices for energy, goods and raw materials continue to surge, the question is, how will it impact your business, and is there anything you can do to combat it?

Why is it rising? 

Let’s start by discussing why the UK is experiencing an inflation crisis, and why it’s rising at a faster rate than it has in the last 40 years. 

Russia’s invasion of Ukraine 

As one of the leading suppliers of crude oil in the world, Russia’s war with Ukraine has had a damaging rippling effect on the world’s economy. Unable to export at the same rate as before (and for political reasons), many countries, including the UK, have experienced limited shortages which have prompted energy companies to increase their prices. For much of the same reasons, Ukraine, one of the leading providers of grain in the world, has been forced to limit/cease its exportation of various products, including wheat, sunflower oil, poultry and corn. This has triggered a shortage across Europe, and once again increased the demand and price of these products. 

Interest rates 

When covid restrictions were lifted, people started spending more. Firms struggled to meet demand and had to raise their prices. One way to combat rising prices is by increasing interest rates and encouraging consumers to save more and spend less. Long-term, this helps tame the soaring inflation rates.  But as with most things, there is a knock-on effect. And the ones that suffer are those with debt. So those with mortgages, credit cards, bank loans and car finance will feel the pain as the cost of their finance increases as the interest rates do. 

How will inflation affect my business?

The long and short of it is, consumers have less money in real terms. And what’s more, rising interest rates and expensive goods will cost you more to deliver your product. But more importantly, as a business owner, how can you tackle inflation?

Lower profits 

If your customers have less disposable income, the chances are they will be less inclined to spend more than they absolutely need to. If you produce or sell anything non-essential (and even then, you’ll probably face a drop in sales), your profits may not support rising operational and manufacturing costs. 

What you can do: raise your prices the right way 

It may seem like an obvious go-to, but your business could benefit from this strategy to protect against inflation, but only if it’s done right. Don’t scare off customers with dramatic increases across the board. Implement them gradually, over an extended period of time, and try to focus only on the products that affect your margins the most. Talk to your customers and be transparent with them. As much as they may not like the price increases, they know what is going on in the world and they will understand you have increasing costs too. 

Cash flow 

If you’re a small business with limited cash flow, you’re likely going to struggle. If you haven’t set any money aside as a backup, you may struggle to repay loans and debts. And since we know interest rates have risen, the cost of this debt will probably be increasing.

What you can do: create a cash safety net  

If you haven’t already, it’s time to get savvy with your cash and start saving. Make cuts where you can, downsize your office (or get rid of it altogether!), explore substitute materials, negotiate better deals with suppliers, suspend or discontinue products and services that aren’t being used and cut your overhead expenses. These may be tough decisions you have to make but they’ll help in the long run, and ensure your business can weather all economic conditions, including rising inflation.

Expensive materials

As we’ve discussed, almost everything is more expensive and no businesses are immune to rising costs. With everything that is going on in the world regarding food & energy shortages and the impact Brexit has had on importation/exportation and issues with supply chains, you WILL, if you haven’t already, face a mounting bill for the products & materials you need. 

What you can do: if possible, stockpile 

According to leading economists, the cost of goods isn’t going to be cheaper any time soon. In fact, they predict further rises towards the end of the year. If your systems are set up and you have a realistic forecast for sales long-term, stockpile the relevant products & materials you need before even higher prices come into play. But only do this if you’ve crunched numbers and are on track to sell those items- large purchases aren’t wise if you haven’t done your research. 

Customers may abandon ship 

Times are hard. People are desperate. The product you’re selling could be the best on the market but in times of inflation, a cheaper alternative is often more desirable. Be prepared to lose some of your customer bases, it will happen, and may continue to. 

What you can do: prioritise them 

Now is the time to remind your customers why they shop with you, not why they should go elsewhere. A loyal customer base is one of the most valuable weapons you can possess during a time of high inflation, so it’s important to keep them on side. Offer them incentives, tease them with sales, and remind them why your product IS the best and WHY it will benefit them. If you find a way to make them feel special and valued, and you can show them why your product is a BENEFIT to them, not a cost, they’ll stick with you even if prices rise. 

The future trajectory of the current inflation crisis is unclear- it could last months or even years in the worst-case scenario. But if I had to give you one piece of advice, it would be that economies don’t have to define you and your business. It may be tough but there is always a solution, there is always a workaround, and there is always a way to succeed and profit, regardless of what is going on in the rest of the world. While everyone else is sitting around moaning or chatting on social media about inflation (some of these people are still talking about Covid!!) then make the decision to opt-out of it all, learn all you can, make a plan, and profit while everyone else is crying.

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