With record high inflation, it’s no wonder the business community is nervous. In December 2022, CPI was 7.8 – the highest it’s been since the 1980s.
Inflation can be a major challenge for business; increasing costs, squeezing profit margins and making it difficult to plan for the future. However, there are strategies that businesses can use to safeguard themselves against the risks of inflation.
In this article we’ll explore how the inflationary environment is impacting business and what can be done to weather the storm.
What causes inflation and what are the impacts?
First and foremost, it’s important to understand the causes and effects of inflation.
When inflation occurs, the value of money decreases, which means that we must pay more for the same goods and services. This can happen for a variety of reasons, including an increase in the money supply, a decrease in the supply of goods and services (for example COVID-19 related supply issues), or a decrease in productivity.
The effects of sustained inflation can be widespread and severe. Inflation can lead to higher interest rates (hence the 10 back-to-back cash rate rises since May 2022), which can increase the cost of borrowing for businesses. It can also cause consumers to cut back on spending.
So, what can businesses do to safeguard themselves against the risks of inflation?
Control costs
One strategy is to focus on cost control. When inflation occurs, the cost of goods and services increases. By focusing on cost control, businesses can mitigate the impact of rising prices so that it has less impact on the budget. This can involve finding ways to reduce costs, such as negotiating better deals with suppliers, improving productivity, or reducing waste.
Raise prices
When the price of goods and services has gone up as a result of inflation, it’s likely the value of your product or service has gone up too. Businesses may consider raising prices, although this can be a delicate balancing act, as higher prices can lead to lower demand. Do your research into how your competitors are pricing their products and services, and assess your customers’ expectations, in order to strike the right balance.
Diversify revenue streams
Inflation can hit different sectors and industries in different ways. By diversifying revenue streams, businesses can reduce their exposure to inflation in any one sector or industry, spreading their risk. For example, a retail business might diversify by selling a wider range of products, or by expanding into new markets. A manufacturing business might diversify by producing a wider range of products, or by exploring new distribution channels.
Innovate
By focusing on innovation, businesses can find new ways to deliver value to customers, even in the face of rising prices. This can involve investing in new technology, exploring new business models, or developing new products or services. The impacts of this in an inflationary environment are two-fold; to maintain demand despite a reduction in purchasing power and to find efficiencies which may carve out more profitability.
Manage debt
When inflation occurs, interest rates can rise, which can increase the cost of borrowing. Businesses that are heavily reliant on debt may struggle to manage their cash flow in an inflationary environment. By managing debt carefully, businesses can reduce their exposure to rising interest rates. This can involve paying down debt, refinancing debt, or renegotiating debt terms with lenders.
Invest to hedge against inflation
Finally, businesses can consider hedging against inflation. This can involve investing in assets that are likely to increase in value as inflation rises, such as commodities or real estate.
In conclusion, operating in an inflationary environment can be challenging for businesses, but there are strategies that can be used to minimise the impacts. By focusing on cost control, diversifying revenue streams, innovating, managing debt carefully, and hedging against inflation, businesses can navigate the challenges of inflation and continue to thrive despite the impacts of inflation.
Looking for advice on how to safeguard your business against inflation? Contact us today to find out more.
The material and contents provided in this publication are informative in nature only. It is not intended to be advice, and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
Ryan Miller is the founder of Keeping Company, May 2011 – Present. A tie-loathing, people person with an entrepreneurial spirit. Ryan’s drive to modernize the accounting industry coupled with his desire to help people succeed saw the birth of Keeping Company. Focusing on the SME space, KeepingCo. empowers business owners by providing high-quality end-to-end accounting and business advisory services.
Ryan took his first Accounting role working at KPMG. He went onto further refine his skills as a Chartered Accountant taking the role of Director of a Chartered Accounting firm in Erskineville.
Ryan is a fully qualified Chartered Accountant and a member of the Institute for Chartered Accountants Australia and New Zealand. He is also a Registered Tax Agent and holds a Bachelor of Commerce from the University of South Australia.