The past decade or so has seen low levels of inflation across the globe but sadly, all good things must come to an end. The economic impact of the covid-19 pandemic means that we’re likely to see an increase in inflation in the not-too-distant future, and this could have serious consequences for your business. Whilst some businesses do benefit from inflation, others take a significant hit. As a business owner, it’s important that you understand how inflation could impact your startup and learn how to weather the storm.
What is Inflation?
Inflation is the decline of a currency’s purchasing power. The prices of goods and services continually rise so that each unit of currency buys less. Your capital doesn’t go as far as it used to, and the financial health of your business may suffer as a result.
How Does Inflation Impact Startups?
Inflation means a significant increase in spending for your business. The cost of internet, electricity, and materials you will soar and your startup will need more cash to stay afloat. Many governments require businesses to raise staff salaries in line with the rate of inflation, adding a further burden to your budget. If this is not the case in your country, remember that inflation will also impact your employees’ lives and they’re likely to request a pay rise, or defect elsewhere.
Additionally, inflation can be difficult for startups to handle due to all of the uncertainty that comes with it. It’s impossible to know exactly when inflation will begin and end, which can make it difficult to plan for the future and map out your growth.
Which Businesses are Best-Positioned Against Inflation?
One of the silver linings of inflation is that it’s easy to work out whether it will benefit or disadvantage your business, and plan accordingly. Inflation does put significant strain on many startups, but there are winners and losers in every situation.
The businesses who fare well during inflation are often the ones with low operating costs, as they are less affected by price increases. The fewer expenses a company has, the less of a threat inflation represents.
As for businesses with a higher rate of cash burn, being able to command pricing power makes it easier to stay afloat. Pricing power allows a business to raise prices whilst maintaining, or even increasing, demand. This is commonly seen with luxury and high-end brands. Consequently, businesses with a lot of pricing power often do very well out of inflation.
How to Protect Your Business Against Inflation
Even if your business is likely to suffer from inflation, there are steps you can take to soften the blow.
Firstly, you should examine your credit cycle. Inflation decreases the value of credit. Whether or not this is advantageous to you depends on whether you’re the buyer or the seller.
Buyers should aim to extend their loans. Inflation means that the real value of the debt will decrease, making it easier to repay.
Sellers, on the other hand, should shorten their credit cycles because this decrease in value will cause them to lose money.
You also need to think about how to safeguard your business savings. Inflation makes your money less valuable and therefore it’s worth storing it in inflation-protected treasury bonds, which are designed to protect you against this.
Domestic inflation also impacts foreign sales. Shifting exchange rates could mean that your goods and services become more affordable for overseas customers, leading to a rise in demand. However, it’s often wise to trade in a reliable currency, such as the U.S. dollar or Euro, to protect your interests against sudden changes.
Takeaway
It’s impossible to say with certainty whether inflation is imminent or not, but it’s always best to be ready. Inflation can strike at any time and it’s best to be aware of your options when it does. The businesses who succeed are the ones that prepare.
