How will inflation affect small businesses?

Due to increased demand, high energy prices and supply chain issues, inflation has risen dramatically – and is expected to rise further in 2022. Here’s how the increase could affect you, so you can start preparing your business and protecting your supply chain. 

What is inflation? 

Inflation is the measure of how much prices of goods and services have gone up over time. The Government sets the Bank of England an inflation target of 2% to keep our economy stable, and to help businesses and customers plan their finances. 

You won’t usually notice the price changes on a day-to-day basis, but in the long-term, inflation can have a huge impact on your cost of living. 

What is the current rate of inflation? 

Despite the Government’s target, inflation in the UK is now at its highest level in decades. In April 2022 it soared to 9% – compared to just 2.5% back in June 2021 – and it’s been warned that the rate could reach 10% within months, which will have a huge impact on our cost of living.

What is causing the rise in inflation? 

Typically during a recession, unemployment rises sharply and consumers reduce their spending as a result. However, the recession caused by the pandemic was unusual as many jobs were protected by the Government, and consumers saved up money ready to spend.

So, inflation has now risen because when the economy reopened, people spent much more money than they had during the lockdown. This caused the demand for things like food and drink, fuel, clothing, and meals out to soar. 

Shortages of many items including building materials and computer chips only made this worse. And the lack of shipping containers and lorry drivers has made it more difficult and more expensive for businesses to get hold of goods – leading them to hike up their prices to meet the demand. 

What does inflation mean for my business? 

We’re hearing from so many borrowers who are frustrated by the situation, with the most common issues affecting them being: 

• Increased costs of materials and stock, which can then take 3-6 months to arrive
• Increased shipping costs, with some containers costing up to three times what they used to
• Increased employee costs, with inflation also applying to wages 

These issues can then have a huge knock on effect, with delays often leading to missed contracts, overly-stretched cash flow and difficulties finding new, affordable suppliers. 

What can I do to prepare my business for inflation?  

Thankfully, there’s several measures you can take to protect your business and supply chain from rising prices. Here are five things to consider to help with inflation. 

1. Plan ahead and bulk buy

Inflation is unpredictable, so it could be useful to have a plan in place for any increases. Regularly checking your cash flow can help you adapt quickly to rising prices, as can purchasing what you need in bulk. This may help you avoid delays as your goods will come in one delivery – and also gives you the chance to negotiate with suppliers. 

2. Assess your prices
   

For many small businesses, raising prices can lead to a dip in customers. Instead, you could try selling different products with higher profit margins. Or you could cut the price of one of your best-sellers to draw in more customers who may then purchase other items.

3. Reduce any expenses
   

Streamlining your business processes, assessing productivity and reviewing your production costs are all effective ways of saving your business money, and keeping your cash flow in check.

4. Look after your existing customers
   

According to Forbes, attracting new customers can cost up to five times more than retaining a loyal one – while increasing engagement can help you grow your profits by 25%. So make sure you determine what keeps your customers coming back, and try to replicate the results through your other products or services. 

5. Get a flexible business loan

A fast and affordable loan is a great way to strengthen your cash flow, or cover any bulk or increased costs. But remember to always assess your finances carefully and make sure you organise any finance in good time – so you’re ready to tackle any problems as soon as they arise. If you think a loan could help your business, you can check your eligibility in just 30 seconds.