Impacts of Inflation on Small Businesses

Periods of rising inflation definitely make for an anxious time. Sudden increases in inflation are a sign that the nation’s economy isn’t doing as well as it should. One of the major downsides is that the currency in your country will be worth less as inflation grows. This is a huge concern, and just one of the impacts of inflation on small businesses.

Whether you are worrying about your own personal finances or you are a small business owner with overhead costs to meet such as rent and wages, you should prepare to feel the impact on your pocket.

Due to smaller businesses having less capital, the impacts of inflation are typically felt more by these small firms. Larger companies may not feel the impacts of inflation as much as smaller companies. This is because they can absorb inflation better as they generally have more cash. They are also positioned differently in the market allowing them to more easily pass price increases to their customers.

That’s why it’s so important for small business owners to be prepared. As a small business owner, you need to take measures to reduce these impacts of inflation. Read on to find out more about how rising inflation impacts small businesses.

Increased Costs

One of the impacts of inflation is that it is incredibly difficult for small businesses to avoid increased costs. As the value of the currency drops, essentially all products increase in both literal and relative price. Even if you are paying significantly more on costs, that total amount isn’t a reflection of an improved service. Instead, it is simply a representation of the reduced value of the currency. 

For example, say you are looking to buy a computer monitor for $500. You put the purchase off and go back the next month and see the price rise to $700. It is still worth the same amount in real terms. The price is just artificially ‘inflated’ to cover increased input costs.

This reality doesn’t help, though. This is especially true for small businesses as they lack the resources to make use of economies of scale. Because of this, manufacturing costs also increase substantially. If the business orders their products from suppliers, it will quickly notice rising prices as their supplier looks to deflect the costs inflicted by inflation. It is very common for suppliers to pass their increased costs to their customer (which is you). This is just one of the impacts of inflation and is normal.

This isn’t the only area that will see increased costs. All overhead payments for rent, energy, and any business accessories will also rise. Despite these increasing costs, there are ways to “cut corners”. For instance, could you buy a 4k gaming monitor and double it up for both work and play? Being able to do your hobbies and run a business is important, after all. Having a computer monitor ideal for gaming and business could see you saving a lot of money, as you don’t have to get multiple devices. As a startup at home, this is ideal.

Rising Prices

Another one of the impacts of inflation is rising prices. While it’s never an ideal situation to have no choice but to raise your prices, there are only so many costs that a small business can absorb. Raising the prices of your products and services and passing the cost of inflation on to your customer may become an inevitability. 

This can be especially dangerous for smaller businesses. These smaller companies usually lack the economies of scale to offer discount prices in the first place. They also rely on carefully built-up loyalty and word of mouth and digital marketing to maintain consistent trade. 

While it’s possible that customers will maintain that loyalty, they are all feeling the effects of inflation, just like the business. The need to keep expenses down may overcome their usual consumer behavior.

Slimming of the Workforce

An unfortunate eventuality that you may find yourself facing as a small business owner battling inflation is the need to slim your workforce. This is one of the worst impacts of inflation, as it not only affects your business but also your empoyees. Making an individual redundant is an extremely hard decision to make, but even harder on their personal circumstances.

As costs increase in every aspect of operations, it may become clear that you cannot afford the salaries of your workforce in their current form. This ultimately means you may have to take a hit on your output to stay afloat.

Impacts of Inflation for Your Small Business

Unfortunately, there are many impacts of inflation that your small business will feel. First, all of your costs will rise. These can include the price of labor, raw materials, energy, and your manufacturing process. In addition to this, you may have to raise your prices and pass the increase in costs to your customers. This can be a huge challenge as a small business when you should be focusing on building up brand loyalty with your customer base. Lastly, you may have to look into temporarily laying off some of your workforce until you can work at full production and inflation decreases.

The next year will definitely be a challenge for small businesses due to the complex and costly impacts of inflation.