To ensure that any small business succeeds, it is vitally important the owner understands the factors that can impact the bottom line. One of these key factors is inflation. In this article we look into the impact rising inflation can have on businesses and their profitability.
Australia's inflation rate is heading north and it's not a trend that's welcomed by small business owners.
So, how does rising inflation affect businesses and what can owners do to soften its impact?.
Let’s take a look.
How inflation affects a business?
Rising inflation means higher costs which ultimately affects the cash flow and purchasing power of a business leading to a decrease in profitability.
While inflation can have negative effects on businesses, those able to pass on higher costs to consumers by increasing their prices are less likely to be adversely affected.
7 Ways inflation affects the profitability of a business
1. Supply Chain Disruptions
Inflation can lead to supply chain issues as businesses owners try to source materials at the lowest possible cost. As experienced by the building industry supply chain shortages can lead to delays in production and ultimately, a decline in revenue.
2. CPI Increases
If consumers are paying higher prices for goods and services, the Consumer Price Index (CPI) can also trend upwards which decreases buying power for consumers and businesses alike.
3. Interest Rate Increases
Inflationary pressure often leads to the Reserve Bank of Australia increasing interest rates. In turn increased interest rates lead to higher borrowing costs for businesses and a decrease in profitability.
4. Decreased Consumer Spending
As the purchasing power of consumers decreases, they are likely to cut back on spending. This can lead to less income for businesses that rely on consumer spending.
5. Increased Overhead and Inventory Costs
The increased cost of materials and stock that are also caught up in supply chain issues can lead to higher overhead and inventory costs which further eats into a business bottom line and profitability.
6. Increased Wages
Along with the issues related to COVID inflation can lead to increased wages for employees who due to prices rising struggle to maintain their buying power. Paying higher wages puts businesses under even more financial pressure.
7. Old Debt Verses New Debt
As inflation goes higher, the value of existing debt decreases. This can be a positive for businesses as it makes it easier to repay old debts. However, while old debt becomes cheaper, new debt becomes more expensive, leading to increased borrowing costs for businesses.
Does inflation affect all business?
It depends on the type of business as to the impact rising inflation has. Increasing costs for groceries, petrol and loan repayments can lead to consumers spending less on discretionary items such as vacations, new cars, restaurants, and other luxury items. This negatively impacts businesses that rely heavily on discretionary consumer spending but can impact positively on businesses offering non-discretionary goods and services.
In one way or another high inflation tends to hurt most businesses, and some are more vulnerable than others - which is why business owners should monitor inflation levels and adjust their business strategies accordingly.Mhairi MacLeod
How business owners can prepare for rising inflation
It’s important for all business owners to have a pricing strategy in place that can help you absorb some of the impacts as inflation rises.
One option is to raise your prices in line with the rate of inflation so profit margins are retained, but care needs to be taken or a business could price themselves out of the market.
Another option is to up the ante on marketing discounts and promotions to increase foot traffic to offset the increased costs of doing business.
Whatever strategy a business goes with, it’s important to take steps to battle inflationary pressures and protect profits.
A Final Word
Inflation pressures in Australia are increasing and businesses should take steps right now to protect their profitability and margins. These might include raising prices, ramping up marketing to promote unique offerings, investing in equipment, goods and materials with more longevity - so they don't have to be replaced as often and hedging against inflation by investing in assets expected to increase in value, such as commercial property.
For enquiries or assistance with obtaining finance for your business please contact the Astute Ability Finance Group on 1300 306 694 or email us.