What Your Business Needs to Know About Inflation
In some way, shape, or form, every business is affected by inflation every year. The cost of raw materials, labor, and services tends to go up over time. In some years, like 2021, we see significant inflation, and that higher-than-average rate may continue for the next several years.
It’s hard enough to deal with inflation on a personal level. When it’s your business, you are being asked to adapt to a quickly changing economy. You’re also expected to know what the new “fair” price for goods and services should be, which can lead to sticker shock and trouble when negotiating contracts.
You may have some questions about inflation and its role in your business, and we want to answer them.
What is Inflation?
We think about inflation going up, but in fact, inflation happens because something else is going down. That’s purchasing power. It occurs with a particular currency, often independently of other world currencies. Economists measure inflation rates by analyzing the cost of certain goods and services, considered representative of the economy as a whole. They communicate this rise as a percentage. The most common measures for inflation are the Consumer Price Index (CPI) and Wholesales Price Index (WPI).
On top of business expenses going up, on the consumer side, they need to pay more to maintain their current lifestyle or cut back to live within their means. This can, in turn, impact their buying decisions and priorities just as it would yours as a business leader.
Why is Inflation Important?
Inflation impacts the economy as a whole, and steady inflation is a good thing. It exists in healthy, growing economies and leads to better wages and living standards. While it may not appear so at first, it increases customers’ buying potential over time. Workers are willing to pay higher prices because they’re making more, so prices rise again and the cycle continues.
It’s a sign of economic growth.
It’s important to note that inflation does not mean that all prices are going up. However, when the prices of certain goods go up, it causes a perception that other goods and services should be more expensive as well. For this reason, inflation is something businesses can and should navigate in their best interest rather than complaining that “everything is so expensive” now. Seeing this glass as half full instead of half empty will allow you to make the best of the situation.
How Does Inflation Affect Your Business?
You’ll notice several trends that you will need to manage and navigate financially:
- Costs of materials and services going up
- Rising employee wages
- Difficulty purchasing certain goods and materials
- A need to adjust your pricing strategy to account to maintain or even improve profits
How Does Inflation Affect Your Team?
Your team will feel the pinch, it’s likely their cost of living is rising faster than their wages. This can lead to a level of discontent, especially if leadership appears oblivious to how inflation impacts individuals.
Their cost of living is rising, meaning they will need more money to survive. Since the value of money is decreasing, it may lead them to spend a higher percentage of their salary on living and reduce the amount they have to set aside. This can lead to financial instability.
With that said, team members are more likely to stay with your business because the paycheck is a necessity as prices rise. You’ll also find you can offer employees higher wages and expand hiring with minimal impact on the company. That’s because you’re paying them with a dollar that is less valuable to you even though the physical amount is more. On the other hand, you may have to make employment cuts to keep up with higher costs of goods, especially in the short term. It can turn into quite the balancing act.
Should You Adjust Your Budget to Match Inflation?
In a perfect world, inflation would increase your spending, but it would also increase your revenue, balancing out and keeping you on track, as if nothing happened at all. But it doesn’t always work like that. Often, expenses rise faster than revenues, squeezing resources.
During this time, it’s vital to re-evaluate your budget and spending to make room for more spending where you need it. As prices go up, it’s even more important to spend as little as possible while maintaining the needed quality.
Can an Accountant Help You Manage Inflation?
You have many line items to manage during a period of significant inflation. How you navigate them can significantly impact your business health and growth potential. Working with an accountant is the best tool for managing inflation’s impact on your business. They’ll help you set prices and provide strategies for lowering costs.
Are you concerned about how inflation will impact your business? Work with U-nique. We’ll answer your questions and help you navigate the effects of inflation.