A variety of economic conditions can affect companies. Some of the most popular ones are inflation and deflation in businesses and the market as a whole. Even though many business owners might be prepared for a rise in prices, inflation can have additional effects. A good example can be a significant increase in logistics costs or a global impact on the food and agricultural supply chains. In this blog article, we’ll dive deeper into the topic of how to deal with inflation in a business and the ways to benefit from that economic condition.
Impact of Inflation on Businesses
Inflation itself is triggered by other factors such as a liberal fiscal policy and global crises. These factors create a chain of events that increase the prices of goods and services and reduce the purchasing power of consumers and businesses. Let’s dive a little deeper into the main impacts of inflation on businesses.
- Increased costs. The main result of inflation for companies is the rise in costs. Initially, the cost of goods rises. Soon after that, the staff demands higher wages and the cost of labor rises as well. In order to keep the profit margins, companies should consider passing these additional expenses to customers by increasing their prices.
- Reduced purchasing. As prices jump, consumers are less likely to spend a lot on non-essential goods. That can impact businesses from the beverage industry, hospitality groups, entertainment, and retail businesses.
- Uncertainty. Both consumers and businesses are not certain when the inflationary period will end. The uncertainty makes planning and investment decisions difficult.
- Increase in interest rates. Central banks fight inflation by raising interest rates. This is problematic for businesses with a lot of debt.
- Dissatisfied employees. As prices increase, employees can buy fewer things with their salaries. That’s why they might be dissatisfied with their employer and demand higher wages.
- Pricing of goods and services. Most competitive market niches usually have smaller profit margins. That’s why it can be difficult to pass the increased cost of goods sold to customers. Furthermore, increasing prices creates more operational work and costs. For example, restaurants that have paper menus should consider switching to restaurant QR code menus instead of ordering new menus every time they change their prices.
Key takeaway: The impact of inflation on businesses is frequently negative and can cause serious problems for businesses that aren’t prepared for it. However, companies can also benefit from the rise in prices in various ways.
How Businesses Can Prepare for Inflation
Rising costs don’t come out of nowhere. There are signals of inflation that can show companies that the economy is overheated. When these signs occur, businesses should prepare for the upcoming inflation. Here are a few ways to do so.
Analyze Costs
The increase in retail and wholesale prices can be tracked with the right business analytics tools. Businesses can check where they can cut costs so that they don’t struggle if prices start increasing.
Diversify Suppliers
As inflation can cause supply chain disruptions, businesses should partner with multiple suppliers instead of relying on just a few. By improving their vendor relationships, they can also negotiate better prices and benefit from special offers.
Manage Debt
If you’re wondering what businesses flourish in recession or inflation, the answer is businesses with little or no debt. As interest rates grow, debt can become a big burden for businesses.
Long-Term Contracts
Wholesalers and other businesses can benefit from long-term contracts. Wholesale distributors should consider negotiating long-term contracts and locked prices with manufacturers and importers. On the other hand, wholesalers that have long-term contracts with clients need to make sure that there are adjustment mechanisms that tie the prices to inflation.
Cash Reserves
Even though money loses its value with inflation, a business that has good cash reserves can benefit if hard times come. In fact, some companies even buy out their competitors that are struggling because they haven’t prepared their business for recession.
How Businesses Can Benefit from Inflation
Although the impact of inflation on businesses is often negative, companies can turn the situation to their advantage. Allow us to share a few ways to do so.
- Investment opportunities. Companies that are well-positioned to face inflation can benefit from other businesses’ struggles. They can either negotiate better prices, invest in software, or even buy out competitors that are on the brink of bankruptcy.
- Pass costs to customers. Businesses that are in a market with inelastic demand can increase their prices to match the inflation even if their costs haven’t increased that much.
- Assets as a hedge against inflation. One of the ways economic growth affects businesses is that it creates a lot of opportunities. During prosperous times, companies can invest in assets such as real estate and sell them during inflation at a higher price.
- Diversify the portfolio. Some regions and markets can be affected by inflation in different ways. That’s why businesses that are located in an area with higher inflation might benefit from it by ordering goods and services from regions with lower inflation.
Frequently Asked Questions about the Impact of Inflation on Business
If you have read this far, you probably have more questions regarding the effects of inflation on businesses. In the next paragraphs, we’ve answered some of the commonly asked questions on that topic.
In What Should Companies Invest to Reduce the Impact of Inflation on Business?
During inflation, companies are encouraged to invest in certain aspects in order to go through the period with more positives than negatives. Let’s briefly see the main things businesses should consider investing in during inflation.
- Automation. By increasing efficiency, a company is reducing labor costs;
- Energy efficiency. As energy prices rise during inflationary periods, implementing energy-saving measures can be crucial for a business;
- Marketing. As most companies cut advertising and marketing expenses in difficult periods, a business might negotiate much better contracts with marketing agencies.
- Real assets. One of the impacts of inflation on businesses is the drop in real estate prices. Thus, companies might benefit from investing in real estate.
During inflation, many businesses might struggle. However, all economic conditions affecting businesses might be turned around. Companies should not think about surviving, they should think about winning from the impact of inflation on businesses.
How Can Governments and Central Banks Reduce the Impact of Inflation on Businesses?
Central banks might opt to increase interest rates if the economy is going through inflation. That reduces spending, encourages saving money, and cools the economy. By introducing fiscal policies that impact economic conditions, governments and central banks aim to reduce the impact of inflation on businesses and households. However, that creates other problems as the effects of high interest rates on businesses can also be troublesome.
How Can Businesses Mitigate Supply Chain Disruptions During Inflation?
One of the ways for businesses to prevent problems caused by supply chain disruptions is to partner with multiple distributors and suppliers. One of the benefits of using an eCommerce solution like BlueCart is the fact that businesses in the restaurant industry can find suppliers in various fields.
Another way for companies to reduce the impact of inflation on business is to invest in additional inventory storage. That way, even if there are supply chain disruptions, businesses know that their operations can continue.