How does high inflation affect my small business?

Anyone who’s listened to the news, or been to a supermarket, will be aware of the steady upward creep of prices (i.e. inflation). As a small business owner, you might be wondering: how does inflation affect my small business, and what can I do about it?

In this article I tackle those questions and try to give some answers…

What exactly is inflation (the easy version)?

In general terms; inflation creeps in when demand is greater than supply.  When demand outstrips supply, prices go up. 

What is today’s inflation figure?

As I type, inflation is at 9%.  (You can check inflation at any time by clicking here). 

Who manages inflation?

Inflation falls under the remit of the Bank of England.

‘To keep inflation low and stable, the Government sets us [the Bank of England] an inflation target of 2%. This helps everyone plan for the future’. BoE 2022

So, what’s happened with inflation in recent months?

To put the current inflation rate into context, the average rate of inflation since 2000 has been 2.1%. Today, it’s 9%.

In real terms, what you could buy for £10 in 2021, will now cost you £10.90. 

Why has inflation risen so steeply and so quickly?

The past couple of years has been a perfect storm for inflation…

The Covid-19 pandemic

When lockdowns were lifted, we all went bonkers buying things (all those folks who’d been sitting on cash during Covid).  Reference back to my supply and demand point above – more buying means less goods to buy (unless we make or import more) – which means increased prices.

Brexit

Increased demand is great for an economy that’s been on ice for a couple of years BUT scroll along the supply chains and we had an issue.  Brexit.  Anyone shipping goods from Europe will know what I’m referring to.  There have been whopping delays with a lot of ports grinding to a halt (remember those queues at Dover??).  CUE: limited supply of certain materials.

The price of oil

Then, the price of oil started to skyrocket.  If you cast your mind back to the pandemic, the demand for oil slumped (remember those travel bans?) so producers started to restrict output.  Jump to the end of lockdowns: people started travelling again, manufacturing cranked back up BUT…production didn’t keep up. CUE: another supply/ demand issue.

Russia invades Ukraine

Next up, Russia’s war on Ukraine has led to multiple sanctions on Russia and blockages in the Ukranian supply chains.  They don’t lie when they say Ukraine is the ‘breadbasket of Europe’. CUE: you got it, supply/ demand issue.

China

Oh yes, and finally, did I mention the ongoing Covid lockdowns in China, stalling shipping and exports?

CUE: utopia for supply/demand chaos = spiking inflation.

Okay, I get it.. but how does high inflation affect my small business?

In simplistic terms inflation means increased prices.  Increased prices mean increased costs. 

The key to staying sane during inflationary periods is to focus on maintaining your profit margins (i.e. sales minus costs). So here are a few suggestions:

  1. Look at your costs.  Are they all necessary?  Could you streamline any of your processes?  Do you have those ‘nice to haves’ that could be suspended temporarily?
  2. Look at your prices. Could you increase your prices?  BUT tackle this one with care.  How resilient are your customers?  Have they arrived unscathed post Covid or, are they carrying the burden of lost income and increased debt?  Remember… you don’t want to end up on the chopping board as part of their cost review.
  3. Be flexible and focus on the long term.  What goes up (normally) comes down.  What can you do within your business model that could be more resilient to changes?  I’m not suggesting massive U-turns, but gentle tweaks to your business so that you’re always facing the sun (okay…I’m gonna say it… pivot).

The good news is what comes up (normally) comes down…

Unfortunately, if I knew when this would be, I’d be the Governor of the BOE (who BTW admitted he has no idea either). 

The key to us small business owners is to streamline, keep adjusting and tweaking to remain relevant, and  just hang on in there.

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