70% of Americans, or one in ten people in the US, deem inflation as the number one concern regarding businesses, according to a recent study by Pew Research.
To some extent, it is surprising that inflation has overshadowed the aftermath of the pandemic, yielding a new issue of concern for many small-business owners or corporate companies.
According to the Special Report by the US Chamber of Commerce, 85% of all small businesses state the negative impacts of inflation highly concern them.
Inflation is taking its toll on every business owner, from elevated raw materials prices to reduced profits. In this article, we’ll dive deeper into some effects of inflation on business in 2022 and the reasons and ways to deal with them.
What Makes Inflation Skyrocket Today?
The financial impact of the pandemic left the world constrained in terms of keeping up with supply and demand. People lost jobs, businesses closed, and even the trading markets lost their previous power – all of it conditioned an increase in prices.
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Aside from the pandemic, another significant aspect of the peaking of inflation is the Russia-Ukraine war. Although Europe is mainly affected by this issue, the rest of the world, too, feels the consequences.
Since Russia and Ukraine are the big players in the production and export of grains, the world is automatically deprived of those essentials. Moreover, as one of the top exporters of crude oil, Russia impedes gas import to most countries around the world, thus raising the costs – for individuals and businesses alike.
In Which Aspects Does Inflation Affect Businesses?
Essentially, businesses are affected by inflation in 4 different aspects:
- Borrowing difficulties;
- Raises overhead expenses;
- Decreases revenues, and
- Reduces profits.
Creating Difficulties in Borrowing
It’s only logical for business owners to opt for loans to keep their businesses running. However, decreased revenues and lower profits result in poor credit scores, which is why companies can’t take out good loans.
Put, banks or loan companies don’t give beneficial interest rates to businesses with bad/low credit scores. The type of credit they give is usually accompanied by high-interest rates, which only deepens the company’s instability.
Raising Overhead Expenses
Due to the rising price of raw materials and manufacturing costs, an increase in overhead expenses is bound to happen.
For example, a business that requires workers to be physically present on-site will have more overhead expenses than companies that can operate remotely. Unfortunately, not all businesses can adopt a remote style of work, which is why inflation has hit hard many business owners.
Due to fear of losing customers, many businesses will rather go for paying more than raise the prices of their goods and services.
Corporate-level companies can afford to pay more in manufacturing/acquiring costs, but a small business might not. Now, adopting an increase in costs and a decreased sales volume equals drastically flopped profits.
The fluctuation of the value of money has rendered the American dollar (as well as many other currencies) a not-so-powerful coin as it was. With this in mind, customers have less purchasing power and spend less on goods and services, which translates to businesses experiencing a decrease in sales.
How to Survive Inflation?
In the post-pandemic world of today, global trade is still recovering. The ongoing conflict between Russia and Ukraine worsens the world’s economic future.
Still, there are some tips to consider for surviving the effects of inflation on 2022.
Plan Cash Flow Ahead
Cash infusions will become paramount for businesses at some point, especially with the increase in costs and reduction in revenue.
So, every business owner will need a financial cushion to soften the blow. For example, if you face difficulty attaining loans or grants, an alternate funding source will be a game-changer for your business.
Revise Pricing Strategy
Keeping up with the pricing trends and the economic fluctuations can mean a leg up for your business. Dedicate some of your time as a business owner to research the market and see whether the time to raise the prices is right or you’ll need to lower them.
Re-evaluate your business plan and see what’s essential for your business to stay up and run. Cut off all non-essential costs, determine what’s a must for your business, and which aspects you can go without.
Conclusion: The Effects of Inflation on Businesses in 2022
Inflation has been merciful to businesses, from causing a shortage of goods and raw materials to reducing profits and revenues.
Being mindful of business expenses and operating costs, and finding ways to adapt to the changes, can help your business stay afloat in these difficult times for the global economy.