As the cost of living crisis has taken hold, inflation is something which we’ve all noticed recently, and this is reflected in the stats. According to the Office For National Statistics, the Consumer Prices Index, which is one measure of inflation, rose by a whopping 8.2% in the 12 months leading up to June 2022. We can see evidence of this in our daily lives. Whether it’s getting the weekly shop in or adding fuel to our cars, the price increase for the products and services we use day-to-day is hard to ignore. It’s clear to see how inflation puts a strain on our personal finances, but how does inflation affect businesses? These are just a few of the ways in which businesses might be affected by inflation.
Disruption To Supply Chains
One of the biggest impacts of high inflation on businesses is disruption to the supply chain. This means that companies will be struggling to get the essential goods and materials that they need, often facing long delays to get the goods they require. Supply chains and inflation work hand in hand, as a lack of supply causes prices to rise. In order to minimise the impact of supply chain disruption on your business, if you can, make sure to use multiple suppliers. This will ensure you aren’t overly reliant on a single supplier and have more opportunities to get the goods that you need sooner.
Increased Cost Of Raw Materials
When looking at the question of how does inflation affect businesses, it’s important to emphasise its influence on a companies’ ability to get basic supplies. Unfortunately, an inherent part of rising inflation levels is an increase in the cost of raw materials. The cost of raw materials will vary depending on the supply and demand of the market. The natural consequence of an increase in the cost of raw materials is that businesses put their own prices up in order to accommodate for the pressure on their supply costs.
Increased Overheads & Inventory Costs
As consumers, the most obvious sign of inflation is that we’re paying more for our shopping and the services that we use. When asked ‘how does inflation affect businesses’, similar answers apply. In short, everything goes up in price. This includes rent, utilities and the cost of carrying and building new inventory. Wages will also often be increased, as employees require a higher wage in order to accommodate for the increased cost of living.
Higher Interest Rates
One of the biggest risks of inflation is that it has lots of knock-on effects. When inflation rises, so do interest rates. The main issue with this for businesses is that it makes it more expensive to borrow money from lenders. This is a particular problem for companies that have overdrafts. In addition to this, increased interest rates are likely to cause a decrease in sales as consumers cut back on what they are spending, which brings us onto our next point.
Decreased Consumer Purchasing
How does inflation affect businesses in relation to consumer spending habits? Well, the natural result of increased prices is a decrease in consumer purchasing. Consumers simply cannot afford to spend as much money on non-essential goods as they once did. However, it’s important to emphasise that consumer behaviour does not alter as much in regards to purchasing essential goods. As consumers feel the strain of inflation, they’ll be looking to spend on key resources, and save money by cutting out non-essentials.
Difficulty Planning For The Future
The impact of inflation on businesses isn’t just direct. One of the more indirect effects of inflation on businesses is that it makes it more difficult to plan for the future. When the economic climate is turbulent, such as we’re experiencing right now with the cost of living crisis, it’s hard to make accurate financial predictions. Circumstances change more rapidly, and a lot of businesses are functioning day-to-day rather than looking to the future. In order to help minimise disruption, it’s important to ensure the business is continuing to maintain accurate records, in order to monitor any issues, and prevent any problems from escalating.
What To Do If Your Business Is In Trouble
We’ve answered the question of ‘how does inflation affect businesses’, but what do you do if your business is struggling with these impacts? If your business is facing financial difficulty and you are concerned about the future, don’t hesitate to get in touch with Ballard Business Recovery. It’s important to seek professional guidance as soon as you can in order to put your company in the best position possible for recovering. Our experienced team of business rescue specialists can talk you through the best options for recovering your business and moving forward positively.
