It's important you know the answers to these questions so you can keep your business running as efficiently as possible, ensuring financial stability and avoiding having to raise client prices or keep employee wages stagnant at a time when they really need to increase to keep up with inflation.
To learn more about the cost of inflation, its impact on small businesses, and how you can deal with the associated price rises, keep reading.
How is inflation measured?
Inflation essentially refers to the cost of living and is calculated by the government through the Consumer Price Index. A survey is conducted that looks at the average cost of goods and compares the results to a year ago. An average household basket is compiled and the overall price increase – if any – is calculated.
An inflation example would be a bag of pasta costing £1 in 2021 but costing £1.05 in 2022. This 5p increase means the rate of inflation is 5%. By this example, everyday goods would be 5% more expensive in 2022 than in 2021, and that’s exactly where we’re at now.
Inflation is currently at its highest price for 30 years, with some experts predicting it could increase further to 7% by October. For the first time in decades, wages are not keeping up with inflation which means the cost of living is not reflected in a proper living wage for most people.
This is causing all sorts of problems for people, and it’s posing unforeseen issues for businesses, too.
What is the cost of inflation to small businesses?
With inflation mostly relating to the cost of living, you would be forgiven for questioning its link to small businesses. The reality is, inflation affects every aspect of life, from the price of a mortgage to the price of fuel, and these increases can have a direct impact on businesses. For example, corporate buildings require heating in the same way homes do, and this means if the price of gas goes up, so does the price of heating which means your corporate energy bills will be higher.
In a likely manner, if your business offers fuel expenses to its employees, or if your business relies heavily on travelling (labouring etc.), then an increase in the price of petrol or diesel will likely hit you hard. On top of this, if your business is B2C then you may find with the cost of living going up, fewer people have disposable income, meaning your revenue could take a direct hit, especially if you’re more of a luxury or leisure retailer as opposed to an essential or basic needs service.
Every business and sector will be hit differently by the rise in inflation and its associated costs, like with every home. After the financial struggle of the last two years, a record-high inflation rise is the last thing many small businesses need, but there are a handful of ways you can mitigate the effects on your business.
Automate processes and invest in technology
Technology is something that the world relies on but that few small businesses use to its full potential. In fact, the majority of small businesses likely have one or more areas that could be automated but that aren’t, either through an unwillingness to adapt, or a genuine unknowingness of what’s out there.
The government recently launched a scheme to help small businesses get to grips with new technology. It’s called the Help to Grow: Digital scheme and aims to support small businesses with finding and adopting the right new technology for them in a bid to help them grow. This is a useful tool from a growth perspective, but it can also help you minimise the effects of inflation.
When you automate elements of your business, you not only leave minimal room for error, but you also lower your associated overheads. For example, if you adopt our smart accountancy software and expert finance suppport, you can akeep better track of your cashflow, allowing you to see where your money is being spent and where it’s coming from. The benefit of this is that you can easily identify new trends or patterns and take action beforehand if needed.
Another reason to adopt new technology is so you can expand your customer base and connect with your clients in a different way. This could set you apart from your competitors. Add to this the fact workloads will be lessened on your staff because mundane and often monotonous tasks are taken care of, and you’ll soon find that your business is far more streamlined overall.
Efficiency and inflation go hand in hand – when you’re trying to fight back on rising prices, you need to have a better grip on your finances and minimise your overheads where possible. Technology can help you do that – and grow in the process.
Do you want to learn more about streamlining your accounting processes and preparing for accelerated growth as a consequence?
At Accountancy Cloud, we’re specialists in helping businesses automate their finances and make better business decisions. Find out how we did just that for MORI by overhauling their bookkeeping services and preparing them for growth.Read more
Buy products in advance
The second way your small business can prepare for inflation-driven price increases is to buy more inventory and stock now. As mentioned, many experts believe inflation is going to increase by a further 2% before October, and this means the cost of goods will likely increase. You can avoid getting stung by potential future price increases by buying up stock and inventory now. Whilst it’s still more expensive than it was last year, it’s likely the cheapest it’s going to be all year.
If you have surplus revenue now, make sure you’re spending it wisely rather than stockpiling it. It’s tempting to keep it, but you’ll burn through it in no time if inflation keeps rising, so if you have the means to do so (both financially and logistically), consider buying items in advance of another price increase.
Another benefit of doing this is that you’ll be prepared should there be any more shortages or Covid restrictions unexpectedly implemented.
Negotiate long-term, fixed contracts with suppliers
The final way we suggest you fight the rise in inflation is to negotiate long-term, fixed contracts with your suppliers. This includes product and service providers, as well as companies who supply your energy. When you’re locked into a fixed contract, you’re able to better control your finances because you know your expected outgoings for a certain period of time. This helps you better balance your books and understand your cashflow, but that’s not all.
If your prices are fixed and contractually binding, that means even if inflation increases, your prices won’t. This is a key factor in mitigating the effects of inflation, especially if it rises to predicted levels in autumn. Whilst there’s no certainty around this, conflict and Covid play big roles in inflation, and with both present at the moment, it’s more likely the 7% prediction will come true than not.
When looking at new contracts, make sure you lock yourself in until 2023. It’s thought that the after-effects of Covid will have started to subside by then, meaning inflation is likely to drastically fall, resulting in a more affordable way of living.
Inflation is something we’re all going to have to deal with, but by taking the right steps now, you can protect your business from possible hardship in a few months. If you adopt efficient technology, stockpile goods, and negotiate new contracts that ease you into the 2023 tax year when inflation should have reduced considerably, you will likely find yourself well-equipped to deal with whatever comes next.
How Accountancy Cloud can help
We can’t control inflation rates, but we can help you streamline your business and better understand your finances so you can deal with any price rises accordingly. Our experts in online accounting, CFO and R&D Tax are on hand to discuss your concerns and find a suitable solution that will make a real impact.
To find out more about how we can help you battle the rising cost of inflation and keep the negative effects at bay, contact us today.
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