When economies undergo inflation there are a range of effects that your business is likely to feel and which you will need to manage. Some of those main effects, and tips for how you can cope with them, are covered below. It’s worth first taking a moment, however, to get to grips with exactly what is meant by the term “inflation”.
What is Inflation?
When the economy is described as undergoing inflation, it means that there has been a sustained increase in the price of goods and services over a significant period of time.
As a result of that continually increasing price, a unit of currency becomes relatively less valuable, in that it becomes able to purchase comparatively less. When there is a 5% rate of inflation over a year, for instance, a product which would have cost £1.00 at the beginning of that year would cost £1.05 at the end of it.
It is important for banks and governments to keep a lid on inflation because of the effects it can have on businesses. Those effects include increasing operational expenses, lowering consumption and making debt more expensive.
As our definition above explains, inflation reduces buying power and so causes prices to rise. In the case of businesses, that means the cost of buying from suppliers will increase and thus their operational expenses are bound to go up.
For many small businesses which operate with tight profit margins, it’s crucial to be able to offset those rising expenses. A simple yet effective way to do so is by negotiating payment or delivery terms with your suppliers in a way that mitigates the impact of any rising prices. At the end of the day, the supplier will not want to lose your business and so should be receptive of such negotiations.
When inflation causes prices to rise, an increasing number of consumers decide to hang on to their money in the hope of a potential future decrease in those prices. For businesses, therefore, this lowered consumption can lead to a decrease in both turnover and in profits. It can also lead to greater competition within a given industry as rival companies are required to fight harder to secure the business of consumers.
There are a few different measures which a company can take in order to mitigate the impact of lowered consumption. Lowering prices, for instance, will immediately make a business’s goods or services more attractive to consumers. Keeping additional lines of credit open, too, can help to keep turnover from dipping quite so dramatically in the wake of sustained inflation.
Alongside businesses, financial institutions also feel the effects of inflation. As a result, they tend to increase their interest rates during periods of sustained inflation to offset the relative reduction in the value of currency. Businesses who borrow money at these enhanced interest rates, as a result, will find that they are more expensive to pay off in the long term.
In order to offset this particular inflation-related issue, businesses are best served by looking for assistance from consultative lenders. Those lenders who can help a business to identify and secure different methods of funding that are better suited to helping them achieve their business goals during both the upswings and the down.
At Boost Capital, our business loans can work with your unique business situation and we don’t follow many of the stipulations a traditional bank loan would come with. We’re dedicated to providing you with the funding you need and helping your business succeed. If you have any more queries about applying for business loans, take a look at our frequently asked questions or speak to a member of our friendly team on 0800 138 9080.