It’s no secret that our economy is a mess right now, and we are all feeling the pinch of inflation that could very well be headed towards hyperinflation. If you’re wondering how inflation impacts a business, we’re here to help shed some light on it.
How Does Inflation Affect a Business?
Inflation impacts businesses the same way it affects individuals: it makes everything cost more. From the supplies and raw materials you need to run your business to the employees on your payroll, you are paying more now than you were this time last year…or even a few months ago.
Inflation occurs in two primary ways: cost-push and demand-pull which we’ll briefly summarize here. (Investopedia has a great article on Cost-Push Inflation vs Demand-Pull Inflation if you want to dive deeper.)
Cost-Push Inflation occurs when something happens to force business owners to suddenly pay more to create the goods or services they provide. For example, if a law is passed that raises the minimum wage, it would cost more per hour for what employees are doing. That cost is then passed on to the consumer which pushes the price higher.
Demand-Pull Inflation happens when people start wanting more and more of what a business offers. Since product supplies are limited (or there are only so many hours in the day to provide a service), that demand pulls the price upward as the owner is able to charge more.
Sometimes cost-push and demand-pull happen at the same time. That’s what we’re seeing now in the U.S. economy.
Disruptive COVID-19 responses, labor shortages, supply chain issues, federal monetary policies, rising gas prices, and global unrest are all pushing costs higher and higher. These are variables that make it more expensive for business owners to do business.
As people sense their money becoming less and less valuable, they begin to try and spend it while they can to stock up in anticipation of further inflation. This creates a sense of scarcity and demand which causes prices to further increase.
What does this mean for the future? Will inflation go down in 2022?
Deloitte recently posted an article titled “Keep Watch, Keep Calm: The Impact of Inflation on Business” in which they used a pretty good analogy of weather reporting to help business owners think about which direction our current inflationary period could go. They give 4 possible scenarios:
- “Blue Skies” – Inflation returns to around a healthy 2% (where the Fed typically tries to keep it), and consumers begin to spend more on services rather than essential goods
- “Sun Showers” – Inflation hovers a little higher than desired at 3-4%, the Fed gets more involved in trying to control it, and we see more unemployment and continued higher costs
- “Stormy Weather” – Inflation rises to 8-9%, higher costs for every kind of goods and service, and a recession as people pull back on spending plans
- “Downdraft” – Inflation drops way down to 1%, business leaders aggressively correct supply chain issues, consumer spending on goods decreases dramatically, and businesses slash prices to move excess inventory
Currently, we are certainly in the “Stormy Weather” situation. How long it will last is anyone’s guess, so the best thing is to be prepared and have a plan for survival.
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How to Prepare for Inflation
- Stock up on essentials. In times of inflation, it’s not good enough for companies to have minimal supplies and inventory on hand expecting that they’ll be able to order what they need when what they have runs low. Much like buying extra canned goods, flour, and sugar for your home, you should go ahead and stock up on things your business needs to operate.
- Think short-term. As important as it is to have long-range plans for your business, your priority right now has to be more immediate. Put big plans for the future on hold until you have safely guided your business and your employees through the current crisis.
- Focus more on your employees. Inflation is hitting your workforce hard. Many of them may be struggling at home to make ends meet, and they may be wrestling with difficult financial decisions. Find ways to empathize and rally around them to let them know that they are appreciated and you intend to do everything you can to keep the business strong so that their jobs are secure. Keeping employee satisfaction levels high will also help prevent them from leaving for greener pastures…a cost your company doesn’t need as it takes a lot of time and money to replace them.
- Pay attention. As difficult as it is to hear negative news about the economy day after day, you can’t afford to check out and ignore it. Your customers, employees, and those who depend on them are counting on you to be the alert captain of the ship that is your company…watching for trouble and steering it towards safer waters as much as you can.
How to Survive Inflation
Ramsey Solutions has great tips in an article on “How to Combat Inflation” that apply not only to your personal finances, but to your business as well. Their advice is to “protect your ‘four walls’”. Focus your personal budget on food, utilities, housing, and transportation. In your business, what are the core items that are essential to your survival, and what can be put on hold for now?
To those tips we would add:
- Avoid debt. And pay off any you have quickly.
- Look for deals when shopping. Make every dollar matter.
- Focus on saving. Rainy days are here, but be careful about dipping into savings. Keep putting funds aside in case things get really tough.
Prepare for Inflation With an Experienced Guide
Inflation is tough for everyone, but you don’t have to deal with it alone. You have more control over how inflation impacts your business than you realize. We understand, and we can help.
Even though the Consumer Price Index (CPI) is the highest it has been since we started doing business over 40 years ago, we’ve seen up close how challenging and stressful times like these can be for small business owners.
We provide accounting for contractors, service professionals, and other small businesses, but we’re fond of saying our clients know how to “expect more from their CPA.” We’ve helped many people just like you in difficult situations navigate their finances and we’d be honored to help guide you through whatever you’re facing now.
Schedule a call with one of our business experts today!