Inflation is a hot topic in the news lately. So, I’m interrupting my usual “increase sales” articles, and I want to talk about it because, frankly, we’re all a bit freaked out by it.
Let’s talk about what inflation is and what it means for entrepreneurs. This blog post will answer small business owners’ most often asked questions on Google about this subject.
What inflation means
Inflation is a rise in the general level of prices of goods and services in an economy over time. This means that the cost of goods and services will go up, which can harm businesses. To protect your business, you need to stay on top of your finances, work with trusted professionals (accountant, bookkeeper, financial advisor, coach, etc.), increase sales and aim for your most lucrative niche, raise prices and find ways to cut costs.
Inflation versus recession
Does a recession cause inflation?
A recession does not automatically cause it, although it can contribute. Generally, when consumers have less money to spend (because of unemployment or other financial factors), demand for goods and services decreases, leading to lower prices or deflation. However, if the government tries to stimulate the economy by increasing spending or cutting taxes, this can lead to inflation.
Are inflation and interest rates related?
Yes, they are related. Interest rates are used to control inflation and can have a significant impact on businesses. When the Federal Reserve raises interest rates, it is meant to slow down the economy and prevent prices from getting too high. This can be destructive for businesses that need to borrow money, as it will become more expensive.
Stay proactive by applying for a business line of credit!
A business line of credit is a loan that a business can use to finance its operations. It is a revolving line of credit, meaning the company can borrow and repay money as needed. This can be a helpful tool for businesses that need to cover unexpected expenses or seasonal fluctuations in revenue.
The best time to apply for a business line of credit is when your business is doing well, and you have a good credit history. This will show the lender that you are a responsible borrower and that your business will likely succeed. Shopping around for the best interest rates is also essential, as this can save you money in the long run.
Why this happens
Inflation can happen for a variety of reasons. Some of the most common causes are:
- An increase in the money supply.
When the government prints more money, it increases the amount of money in circulation. This can lead to higher prices as businesses compete for limited resources.
- Rising costs of production
Rising production costs are problematic because businesses must raise prices to profit. This can lead to a cycle of increasing prices and higher inflation.
- A rise in demand for goods and services
Rising demand for goods and services can lead to higher prices as businesses compete for limited resources. When there is more demand than supply, prices will increase as companies try to profit. This can lead to a cycle of rising costs.
- External factors such as rising oil prices or a natural disaster
Rising oil prices can cause inflation because businesses have to pay more for transportation, which is passed on to consumers. When oil prices go up, it can also lead to higher prices for food and other goods.
Don’t be afraid of charging a fuel surcharge. When your vendors/suppliers give you a fuel surcharge, it’s fair to pass that along to your customers.
A natural disaster is a major concern because many resources and products are needed to help rebuild what was lost. The demand for these goods drives up prices as suppliers try to capitalize on the situation.
Inflation and house prices
Inflation can also affect the prices of houses. When it’s high, consumers and entrepreneurs tend to invest their money in assets such as property and gold, which can lead to a rise in house prices. This can be good for current homeowners and investors, but it can be challenging for first-time home buyers.
Where in the world is this a problem
Inflation is a general increase in prices and a fall in the purchasing value of money. It can happen anywhere in the world, but it’s more common in developing countries. In the United States, we’re experiencing high levels, but compared to countries all over the world, we’re not the highest. For those that source global raw materials or labor, inflation in those countries impacts our US-based purchasing power.
Why inflation is bad
It’s bad for several reasons. First, it can reduce the amount of money consumers have to spend on goods and services. This can lead to layoffs and reductions in wages. In addition, it can cause businesses to raise prices, leading to higher consumer costs. Finally, inflation can cause investments to lose value over time.
What inflation means for entrepreneurs
First, it’s crucial to understand how inflation can affect your business. If you’re selling products or services, you’ll need to consider that prices will increase over time. Remember to raise your prices marginally each quarter or every six months when the economy runs well. Do you sell commodities? Check costs for all new orders and pass those price increases on to your customers.
Second, you’ll need to stay hyper-vigilant about how inflation can affect your cost of production/cost of goods sold. If you’re buying raw materials or supplies, you’ll need to factor in the possibility that their prices will increase. It affects everyone and can impact your overhead too.
Finally, it would be best if you kept an eye on inflationary trends so you can adjust your business strategy accordingly. A client of mine sells PPE and industrial safety supplies. She works hard to proactively forecast her customers’ needs so she can stock supplies before a shortage takes place.
What entrepreneurs can do about inflation
Entrepreneurs can do a few things to protect their businesses.
First, you can hedge against inflation by investing in assets likely to increase in value. This could include things like real estate or commodities. Manufacturers should invest in higher-capacity machinery to make more parts in less time. Business owners can purchase real estate, have their business work out of the building, and pay rent to the business owner.
In addition, you can reduce your costs by staying on top of trends and negotiating with suppliers.
Finally, raising prices can pass some of the costs on to customers. Are you afraid you could price yourself out of the market? No worries! Focus on value. What can you bring to the table above and beyond the cost of production + a marginal percentage? Is your VIP service? Attention to detail? Research and development support? Whatever the customer loves, put all of your focus on that, so you feel confident about raising prices.
This can be challenging for entrepreneurs, but there are ways to protect your business. Understanding how inflation works and taking steps to hedge against it can help ensure that your business remains profitable in the long run.
Who gets hurt the most?
Inflation can hurt the most vulnerable members of society the most. This includes people struggling to make ends meet and those borrowing money at high-interest rates.
In addition, it can hurt businesses that are unwilling to raise prices. I’ve worked with plenty of entrepreneurs to help them change their minds, so they feel confident about raising prices. This is business! We need to cover our bases and then some.
Finally, inflation can lead to higher costs for consumers (aka all of us) as businesses pass on their increased costs.
How does unemployment come into play?
There is no clear answer, as the two are related. Inflation can lead to unemployment, as businesses may lay off workers to stay profitable. However, unemployment can also lead to inflation, as people may have less money to spend on goods and services.
What about the cost of living?
They are two different things. Inflation is a general increase in prices, while the cost of living refers to the money needed to sustain a certain standard of living.
The cost of living usually goes up along with inflation, but there can be periods when the cost of living rises faster than inflation. This is often the case when there is a housing shortage or other essential goods and services.
What can be done about inflation
There are a few things that the government can do about inflation. For example, in 2008, the USA experienced a 5.1% inflation rate. This was primarily due to high oil prices and the global credit crisis. The Federal Reserve raised interest rates several times to slow the economy and reduce inflation.
Second, governments can enact policies that help to increase productivity and reduce costs. One example of when the USA used building infrastructure to fix inflation is in the late 1970s. At that time, the country was experiencing high levels of inflation, as well as high levels of unemployment. In response, the government invested in large-scale construction projects, such as building roads, bridges, and schools. These projects helped to create jobs and increase productivity, which helped to reduce inflation.
In addition, governments can implement policies that help to increase the supply of goods and services.
An example of when the USA increased the manufacturing of cars to ward off inflation is during the presidency of Dwight D. Eisenhower. The government implemented a policy called the Defense Production Act, which aimed to increase the production of goods and services to help with the war effort. As a result, the automotive industry experienced a boom, and the production of cars increased significantly. This helped to keep inflation in check and allowed the economy to grow.
While inflation can be a challenge for entrepreneurs, there are ways to protect your business. Understanding how inflation works and taking steps to hedge against it can help ensure that your business remains profitable in the long run.
Businesses and individuals can hedge against inflation by working with trusted professionals, watching their costs closely and frequently, increasing sales by aiming toward their most lucrative niche, increasing prices, and investing in assets such as high-capacity machinery that are likely to increase in value.
Now that we’ve established the big picture and covered entrepreneurs’ most frequently asked questions about inflation let’s discover how inflation impacts your business.
Do you analyze your financials monthly to look for ways to find and save money?
Do you raise prices with confidence?
Are you aiming toward your most lucrative niche?
Are you investing in your business to cut costs for the long run?
If you answered NO to any of these questions, don’t hesitate to contact me and apply for a free consultation. I’d love to see how I can best help you through this challenging inflationary period.
Janet Johnson is a small business advisor and author of My Money Pivot: An Entrepreneur’s Guide to Finding & Making More Money and this educational blog. All views expressed belong solely to Ms. Johnson and do not represent the views of her employer. The website, MyMoneyPivot.com, is currently managed by Luz Marcos, Virtual Assistant.