How Inflation Impacts Small Businesses
- July 13, 2022
- By REIL Capital
How Inflation Impacts Small Businesses
Businesses operate in a world of constant and ever-changing markets, but one of the most intimidating aspects of business ownership is the ever-present risk of inflation. In this article, we’ll look at several factors that contribute to inflation and how it impacts small businesses, no matter what size they are.
What is Inflation?
Inflation is the rate at which the prices of goods and services in an economy increase over time. Inflation impacts small businesses in a number of ways, most notably through the cost of goods and services, as well as Annual Percentage Rates (APR).
Small businesses are particularly vulnerable to the effects of inflation because they often have tight profit margins. When the cost of goods and services goes up, it can eat into profits and make it difficult to stay afloat. Annual percentage rates also have a big impact on small businesses. When rates are high, it can make it difficult to get funding or lines of credit, which can be vital for growth or expansion.
How is Inflation Tracked?
Inflation is tracked by both the consumer price index (CPI) and the producer price index (PPI). The PPI tracks the prices that producers receive for their products, while the CPI measures the weighted average of prices of services and goods that were purchased by consumers.
The 2022 Inflation: What Caused it?
Although this isn’t exactly the first time inflation has happened, this year’s occurrence has definitely caught many more people’s attention. Here are the different causes of this year’s concerning inflation–most of it is closely connected to the pandemic.
With the government spending trillions of dollars–allotting a considerable percentage of it towards stimulus checks during the early stages of the pandemic, people knew better not to burn their cash hastily. This resulted in the money being stored away in bank accounts. Since the start of the year, the situation has slowly been reverting back to normal, therefore, people are now choosing to use the savings they had at the height of the pandemic.
Supply Chain Disturbance
Back in 2020, the coronavirus heavily disrupted supply chains across the globe. With the supply chains still painfully affected now by other current situations, there’s no guarantee that the supply chains will resume their normal operations any time soon.
Right at the height of the coronavirus pandemic, millions of Americans became unemployed, which led to the government providing financial assistance for those affected. A lot of people also noticed that there was an increase in income right after they got laid off. Because of this, many Americans took advantage of the opportunity to wait out for employers who were in desperate need of employees. This resulted in a shortage of labor and a disadvantageous labor market for employers.
Higher Energy Costs
With the war between Ukraine and Russia ongoing, oil prices have spiked tremendously. Research analysts have predicted that this won’t go back to its normal state unless the war has been resolved. Although an increase in production provided by other countries is an alternative choice, chances are the high prices of oil won’t be decreasing anytime soon.
The Impact of Inflation on Small Businesses
Inflation is often thought of as an increase in the price of goods and services. While this is true, inflation also includes an increase in the cost of running a business. Higher prices for inputs like labor, supplies, and raw materials can put a strain on businesses, especially small businesses with tight profit margins.
In addition to higher costs, inflation can also lead to lower consumer spending power. As prices go up, consumers have less money to spend on discretionary items. This can lead to a decrease in demand for goods and services, which can hurt businesses that are reliant on consumer spending.
The impact of inflation on small businesses can be significant. It’s important for business owners to monitor changes in the cost of running their business and adjust their pricing accordingly. Taking steps to reduce costs and increase efficiency can help offset the negative effects of inflation and help keep your business afloat.
While there are some negative impacts of inflation on small businesses, there can also be some positives. For instance, if demand for goods and services is high during periods of inflation, small businesses can benefit from increased sales. Overall, though, the effects of inflation on small businesses tend to be negative and can make it difficult to compete in an ever-changing market.
How Small Businesses Can Protect Themselves From Inflation
Inflation can have a big impact on small businesses, particularly if they are not prepared for it. Here are ways how you can keep your small business afloat despite inflation.
- Review your prices regularly and make sure you are still making a profit.
- Look for ways to cut costs without compromising the quality of your product or service.
- Be flexible with your pricing and offer discounts or promotions when necessary.
- Communicate with your customers and explain why prices may be rising.
- Stay up to date on economic news so you can anticipate changes in the inflation rate.
Inflation can be a major problem for businesses, as it can eat into their profits and make it difficult to keep prices competitive. There’s no doubt that this kind of environment can be challenging especially for small business owners. However, despite the unpredictability of inflation, REIL has fixed costs since we don’t go through banks, so you don’t have to worry about how we’re able to get your business money!
If you think your business needs extra help in combating inflation, REIL has a team of experts who will eagerly guide and prevent your business from entering the red zone. Let’s work together. Apply for funding today!