All companies can be affected by inflation, particularly when the rate is high.
To run a successful business, entrepreneurs need to understand all the factors that could impact their finances and future growth. One of them is inflation.
Low inflation can be a time for optimism and opportunity, whereas high inflation means founders might need to focus on cutting costs and making more of an effort to reach customers.
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What is inflation?
Inflation is the term that describes rising prices.
The measurement for how quickly prices increase is known as the rate of inflation.
Every month it tracks the cost of more than 700 typical goods and services.
It includes small items such as bread, milk, tea, and bigger things such as concert tickets, houses, holidays, and cars.
The total cost of the goods and services in the basket is the CPI.
To calculate the rate of inflation, the CPI is compared to what it was a year ago.
How does high inflation affect business?
High inflation can impact start-up businesses in many ways.
Inflation affects the cost of raw materials, so businesses may face higher prices when sourcing stock and supplies.
Supply shortages can also lead to higher costs.
To deal with rising costs, staff may ask for higher wages above the rate of inflation.
This can lead to increased business costs and higher prices, leading to higher inflation.
Employees might switch jobs for a higher salary, leading to recruitment costs.
Unless income increases at the same rate as inflation, customers are worse off, so they have less money to spend with businesses.
Alternatively, some people may decide to stock up on certain products in anticipation of future price increases, so high inflation can be an opportunity to attract new customers.
Tips for tackling high inflation
So what can small businesses do to minimise the impact of high inflation? Here are some tips you may wish to consider:
1. Improve efficiency and productivity
Making your business more efficient and your workforce more productive can help to tackle high inflation.
You could analyse how work can be done more efficiently.
Think about the digital tools that can make processes such as invoicing and marketing more efficient and therefore less time-consuming.
You don’t necessarily have to pay for these tools as there are plenty of free options.
It’s also good to review your business plan opens in new window and consider tweaking goals and targets.
You might need to think about how you can do more with less.
2. Cut unnecessary expenses
A period of high inflation can be a good time to review business costs and determine how they can be reduced.
For example, you could check subscriptions for services such as software and decide whether they are necessary to your business.
You could then opt to cancel them, ask the service provider for a better deal or look for cheaper alternatives.
Consider reviewing travel costs, too.
You might be able to replace physical meetings with video conferencing.
If travel is unavoidable, book transport and accommodation as soon as possible to get the lowest prices.
3. Buy stock in bulk
Stocking up on supplies can help to reduce costs as in a time of rising prices, buying in bulk means you’ll protect yourself from future increases.
Many suppliers offer free shipping for customers spending over a certain amount so you could save on delivery costs, too.
4. Take out a loan
Securing funding could help your business through times of high inflation.
There are various options, and you should shop around for the best solution opens in new window.
The government-backed Start Up Loans opens in new window provide borrowing of up to £25,000 with a fixed interest rate of 6% a year.
You also receive 12 months of free mentoring, which could provide valuable advice on tackling the impact of high inflation.
5. Go second hand
If your business needs expensive equipment, buying second-hand can help to cut costs.
You may be able to purchase perfectly operational former shop display equipment or items with minor damage for a significantly reduced price.
You might also find useful items, such as office furniture, for sale (or even offered for free) on internet marketplaces such as Facebook opens in new window and eBay opens in new window and by using second-hand specialist companies.
6. Switch to outsourcing
Using an external provider to deliver critical business activities can reduce costs as it’s usually much cheaper than paying a full-time employee.
Various processes can be outsourced opens in new window, including human resources, accounting, and marketing.
Bear in mind the potential disadvantages to outsourcing though.
You have less control over an outsourced provider than your staff.
Also, overseas providers can have communication problems if they are in a different time zone or lack sufficient English language skills.
7. Reach new customers
This might seem unlikely, but you could attract new customers during high inflation.
Due to high costs, some consumers might be looking for an alternative to the companies they usually do business with or decide to stock up on specific products and services in anticipation of even higher prices in the future.
You could think about extra services you can offer that might win over new customers but are low cost for you.
Examples include free product samples, extended warranties, and educational ebooks.
8. Raise your prices
Increasing prices is not ideal, but it could help address inflation’s negative impact on your business.
A review of your prices could reveal where they could be raised to improve profit margins opens in new window.
You might want to consider segmenting your customers to highlight those who will be least sensitive to an increase.
If you decide to raise prices, consider doing so in small increments rather than one big hike across the board.
It can be a good idea to be honest with your customers and explain why your prices have risen.
If you communicate it in the right way, you may find that loyal customers are willing to continue to support you.
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Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.