Inflation can have a significant impact on any business, and certainly may hit certain industries and businesses harder than others. Additionally, with high inflation come higher interest rates, which can have a considerable influence on businesses that rely on their credit facilities to support their growth plans.
A few areas where inflation may impact your business include the following:
- Supply Chain Disruption – The country has been mired in supply chain issues for more than a year. Shortages in materials, parts, products, and other items often cause delays in production, inventory, or parts to end users, resulting in slower delivery times, or in certain circumstances, no delivery at all. These factors may lead to delayed or lost sales.
- Increase in Prices – As prices increase businesses experience higher overhead costs, raw material costs, and other costs in the production process. Higher costs can lead to reduced margins and profit erosion if these costs are not passed on to the end user.
- Interest Rates – Inflation has driven up interest rates, with the prime rate going from 3.25 percent on January 1 of this year to 7.00 percent on November 2. The higher cost of borrowing money can have a profound effect on your profits, resulting in less cash available to be used in business operations.
- Higher Wages – Workers are looking for higher wages to keep up with inflation and are putting pressure on employers for increases in their wages and benefits. Businesses that do not address these demands risk losing employees to higher paying jobs. Current market conditions continue to reflect the difficulties in finding people to fill positions across many industries.
Inflation does not impact all businesses the same. Certain companies are somewhat recession proof because they are needed on an everyday basis (e.g.; groceries, health care, etc.). Discretionary spending items can be impacted to a much higher degree since consumers may be willing to forego those items.
Inflation doesn’t always have a negative impact on a business. There can be some positive aspects whereby a company can benefit from inflation, which can include:
- Margins – Inventory purchased before the impacts of inflation at lower costs can result in improved margins as that inventory gets sold at higher prices. Additionally, increasing prices during periods of inflation may allow your business to improve lower margin products or services based on demand and need. The timing of passing on price increases to customers is key to the overall impact to the top and bottom line.
- Revenue Growth – Top line revenue growth for the same volume often accompanies inflation. When a company can add volume in these conditions, top line revenue can grow significantly, reflecting significant increases in revenue year-over-year in the financial statements.
- Lower or Reduced Unemployment – The demand for workers has been high, which as noted above, can be a source of frustration. However, there can be opportunities to find and upgrade talent in various areas of the business. Although it may come at a price, it can help your business support its long-term growth plan.
- Address Supply Chain Issues – This is a good time to review vendor relationships and purchasing habits. It may also be an opportunity to add suppliers and vendors in order to diversify relationships. Having parts and products on hand is important for any business, and therefore, buying habits need to be examined to make sure the quantity on hand allows your business to meet demand over some extended period of time. Using just-in-time purchasing may not be a good operating decision when availability of materials and products is difficult to come by.
Inflation can have a significant impact on any business, resulting in many challenges and issues that need to be addressed by management. However, it may also present opportunities to take a hard look at certain areas and make changes that could have long-term benefits to improve your financial health, including pricing, margins, purchasing habits, and workforce issues.
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