If the economic story of 2021 was COVID, then the story of 2022 is for sure inflation. After a decade of relative inflationary stability and low interest rates, inflation is back with a bang. While economists and world leaders are being careful not to use terms like “hyperinflation” there is a growing feeling deep down in our pockets that this is exactly what are now experiencing.
According to IMF data, inflation is set to peak at 8.8 percent in 2022 which is somewhat of a giant leap from 4.7 percent the previous year. While a two-fold jump is already alarming enough, some economies are seeing even sharper rises. For example, the UK has seen inflation of up to 11.1 percent, and many everyday consumers will still tell you that the real figure is much higher. Of course, some nations have seen much lower inflation and while the “lucky country” of Australia may not feel that a rise of 6.9 is exactly fortuitous, it could clearly be far worse.
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Economic stresses always hit the smallest the hardest and small businesses are really feeling the pinch. This is because they often live a relatively hand to mouth existence and buy in materials and stock as and when they need it. This means that they have to find more money to buy the same items they need to trade month and month. The specifics of exactly where a business is being hit vary between location and sector but for example, small businesses in Western Australia report that they are finding it hard to meet increased wages and rising petrol prices.
Conversely though, they are often not able to pass these rising costs onto their customers and as such have to absorb it themselves.
Inflation cannot be avoided and it is going to impact all small businesses in some form or another. However, there are steps that business owners can implement to try and manage the impacts that inflation has upon their enterprise. Let’s take a look at just a few.
Inflation is not set to tail off for at least a few more months meaning that the cost of supplies for your business, will in all probability only rise further. Therefore it may be advantageous to buy-in as much of your essential supplies as you can now, and put them in storage somewhere.
If you do not, then you will probably just end up paying more for the same items in a few months time.
The chances are that your suppliers will also be feeling the pinch of inflation too. As such it is unlikely that any of them will be willing to reduce their rates and fees any time soon.
However, they may be far more open to agreeing to freeze prices at current levels thus sparing your business further inflation. They will be more likely to agree to this if you are able to offer something on your part. This could be increasing the amount you are buying from them, or extending your contact with them.
Many businesses are reluctant to increase their prices as doing so often causes customers to begin looking elsewhere. That said, with inflation biting as sharply as it is doing right now, your customer base will be prepared for some form of increase.
Be sure to review all of your prices to ensure that you are recapturing at least some of your increased operating costs. While some goods/services are said to have a “cut off point” above which customers will simply choose to go without, this is a fluid situation and you may well be surprised by just how much more your customers are willing to pay.
Of course, managing and reducing operating costs is something all businesses try to do as a matter of course. Most businesses carefully review costs at least annually and some even do it quarterly.
Still, right now you should be pretty much waging an ongoing war on expenditure and constantly looking for ways to cut and save. It may mean turning the heating down in your office, cutting staff overtime or cancelling the Christmas team lunch but there is usually something that can be trimmed in order to save costs.
Some businesses are really going to struggle to weather the storms wrought by inflation. In fact, according to this data from Small Business Loans Australia, an estimated 76% are anticipating an impact on cash flow. In order to survive, some business owners may even be considering taking out additional lines of credit and 54% of Australian businesses owners have stated that they would be open to this (source).
However, taking on debt during inflation can be risky. Firstly, the monthly repayments will add one more outgoing to an already fragile cash flow situation and furthermore, if the interest rate is tied to inflation then the payments could spiral beyond reach.
On the flip side, having access to capital could allow businesses to invest in stock and assets now, before the price of procuring them increases even further.
Responding to challenges is one of the key tenants to running a successful business. Of the businesses surveyed, 60% of micro-small ones said they had a strategy to manage cash flow ‘during challenging periods’ and 40% stated that they would be delaying development and investment until inflation has abated. Of course, nobody knows when exactly that may be and so it seems that the growth prospects of many small businesses may be on ice for the foreseeable future.
No doubt, trading conditions right now are tough for small businesses. However, a successful business will adapt, respond and demonstrate resilience. While some will sadly fail to come out of the other side of this inflationary cycle, the ones that do will be stronger than ever.