The term inflation refers to the phenomenon of rising prices.
In other words, it also refers to the gradual loss in the valuation of the money.
In simple words, it means if you could buy 10 gums for $1 in 1991, you may be able to buy only eight in 2021 for the same amount.
The US Bureau of Labor Statistics defines inflation as a process of continuously rising prices.
This decline in the value of money is a function of several economic parameters.
You may have seen that when people save for their retirement funds, they often talk about inflation adjusted numbers.
But it is not just your savings that are impacted by inflation.
Businesses are perhaps some of the most affected units.
Inflation invariably delivers a double whammy to them.
On the one hand, they have to deal with the problem of money-losing value, and on the other, customers losing their purchasing abilities.
While large businesses have a certain degree of cushion, small businesses become the big casualties.
Tackling Consumer Purchasing Trends
This is invariably one of the first impacts of rising inflation.
They are the lifeline of any successful business.
But if they see a rapid increase in prices, they will stay away from it.
But this will affect demand and eventually the production.
That becomes unsustainable for any business.
So, one of the first tactics to use is to absorb some of the shocks and hope to average out.
But this will not go on for too long.
If the price rise or inflation remains unabated, there is a gradual price rise.
A sudden hike in prices can shock the consumer, so they try to increase it gradually.
But this is a tricky business.
If all the competitors on a given space agree, then this format works.
But in case you are only one, it can often have a double blow, rising input cost and low sales.
This is because consumers are generally smart.
If they notice that only one player in a given space is raising prices, they will quickly stay away.
That will hurt businesses over long-term, and companies often take time to go back to the same level of sales.
This is a point where you can try stealthy inflation tactics.
In this, you do not change the price of the packaging.
But at the same time, you reduce weight.
So if for so long, people were buying x unit for $10, they will buy x-10% for $10.
Most times, consumers are more focused on the price point.
As a result, this is a relatively simpler option to get away with.
It is no doubt sneakier than a direct price rise.
But the advantage is the relative loss in demand and consumers is much lesser.
This keeps the relative margins in place.
Communicating Changes In price
You also make investments in changing this pricing in the packaging.
Whether you produce detergent or have a departmental store, consumers need to know about the new prices.
In case you have an eating joint, a new menu has to be published too.
What are the options for tackling these costs?
While on the one hand, you are trying hard to reduce expenses, this is increasing its manifold.
You also pay for the labor involved in making these changes possible across the board.
This is exactly where the concept of tagging everything separately too shape in the departmental stores in the 1970s.
The idea is when the individual prices are put up, it is much easier to change them.
Moreover, it offered a lot more flexibility to businesses in tackling inflation.
Perhaps online menus in a tab or iPad in restaurants is also a function of this very phenomenon.
The idea is to spend as much money as possible when you can afford to.
What makes this situation even more alarming is the inability to make actual projections.
Inflation is a function of several economic parameters.
Often most of it join hands together for you to see the final impact.
Organic and loose packing is also perhaps a function of this necessity.
After all, small businesses will have to eke out a living.
Unlike a huge business like Unilever, a small soap maker will go bankrupt reprinting individual packaging material.
So it makes more sense to create a generic packaging.
The place next to MRP is left empty and filled as necessary.
Depending on the business situation, you can simply paste stick-on price tags.
These are functional, economical and make for better business sense.
The idea is to make the business as inflation proof as possible.
Dealing With Cost Of Inventory
Inflation does not just curb the purchasing power of customers.
Businesses feel the pinch with their own inventory cost too.
After all, they have to pay for their raw materials and other input expenses too.
If the value of money is reducing, it has an all-round effect.
The rise in input cost is one of the first casualties.
If you sold a packet of goods for $2 and your input cost was 50 cents, your profit earlier was $1.50.
But as inflation comes to play, this expense rises to $1.
Therefore, your profit now reduces to $1 as well.
Moreover, the replacement inventory begins to cost more than what you just sold.
One of the reactions then is to cut down the inventory levels to manage costs.
That again results in the shortage of inventory and a further rise in prices.
This led to the creation of the Just In Time inventory model.
It was a primarily Japanese concept championed by the likes of Toyota and behemoths.
In this case, companies store comparatively much lesser inventory.
You will send orders as and when you got new orders from customers.
But this needs precision and reliable inventory channels for proper execution.
Toyota started this inventory control way back in the 1970s.
But it took the company well over 15 years to perfect it.
In this case, timing is crucial and has to be precise.
A single delay at any point can lead to an outright halt in production.
But the interesting aspect of this approach is, this is a versatile formula.
It works equally well both in the inflationary situation as well as deflationary ones.
It completely wipes out the prospect of carrying inventory too long.
As a result, the risk of selling it at a higher or lower level is cut out.
Dealing With Borrowing Costs
This is another major concern during a rising inflation scenario.
When money flow is comfortable, and banks have adequate liquidity, they expand the loan portfolio aggressively.
For a small business, getting a loan gets that much easier.
They easily get attracted to the lure of these loans.
But what most lose track of is the ever-rising inflation numbers.
They expand as aggressively as they get loans.
But as the inflation noose tightens, maintaining the profit margins will be a challenge.
Often businesses miss the point early on.
What makes the borrowing cycle even more excruciating is the banking policies during easy money.
Also for many, they feel this is a smarter way of taking out money when it is available.
It is common knowledge that somewhere mid-way in the inflation cycle, getting a loan becomes that much difficult.
Though the value of the loan might be cheaper in absolute terms, you need profit to pay it off.
But it is this money that starts getting more and more scarce.
Eventually, the lack of liquidity will curb the borrowing power of businesses.
This is because interest rates will be tightened at some point to curb inflation.
This is the point where lenders start becoming cautious.
Even good credit risks are not able to secure financing.
For many businesses that rely on credit, this could also mean insolvency.
Therefore, it is imperative to manage your borrowing cycle.
Overleveraging the business, especially for the smaller ones is never an option.
As the economic crisis snowballs, uncertainty in markets will rise.
Growth and expansion become a casualty.
So, you have to carefully assess your borrowing policy in a way that you are well protected against this risk.
That alone will ensure that your sustainability in low liquidity.
Dealing With Investments
We noticed earlier that as the liquidity reduces in the market, the business suffers.
The lack of new investment affects growth and general business expansion.
But without new credit, how will investment come about?
Borrowing inflation and investment are all interlinked that way.
It is almost like one factor affects the other.
As high inflation almost strangulates new spending, even simple upgradation becomes an avoidable expense.
With lower profits and higher cost of production, just day to day running of the company can be a challenge.
Investors start worrying about their returns on earlier commitments.
That is what stymies growth even further.
The point here is taking a relook at the business model.
Many times, small businesses have to relook at introducing an inflation safe element.
This can comprise of a variety of aspects that seeks to push the business forward.
So, it goes without saying that if you want to shut out investment completely, it will stunt growth.
You will be unable to take advantage of existing market opportunities.
When conditions are extreme, the solutions have to be so.
Think about how Buffett’s Berkshire Hathaway bought GE during the severe economic downturn that ensued post-Lehman Bankruptcy.
He bought the GE common shares when it was absolutely low.
But 5 years later, when the company turned around, he managed to sell the shares at a distinctly higher rate.
So panic cannot be your reaction in this kind of situation.
You have to think in a rational way and take a step that is best for the business.
This will make sure that the long-term business prospect remains intact.
The overall margins too will be maintained in this form.
As a small business owner, you should be prepared to take the risk then.
Inflation Impact On Wages
Employee wages form a major chunk of any business’ expenses.
However, when a company is grappling with inflation, these wages take the maximum hit.
The overall bonus and wage hikes come to a standstill.
They are hit both ways.
On the one hand, the prices are going higher, and on the other, there is no rise in wages.
Eventually, they will begin to struggle, in terms of meeting their financial commitments.
That is never a happy situation.
Soon after this, the dreadful pink slips will follow.
Companies will start laying off employees.
Joblessness rises as more and more companies start managing cost.
The question is, how can a business survive in this type of situation?
They cannot afford to pay too many employees, so no new investment, tighter borrowing.
This is a classic catch 22 situation.
Often the best survival policy for businesses, in this case, is keeping the employee strength lean.
You do not have to keep it too low but do not recruit more than required.
That way, the relative wage expenses will reduce significantly.
Also, try and encourage multi-tasking within the organization.
The flat operating systems in most small businesses can help to a large extent.
Try and see how each person can contribute holistically to the overall growth.
If required, incentivize them for multi-tasking.
The overall expense in this will reduce even if you maintain a specific pay scale.
Also, keep a conservative bonus policy.
When liquidity is easy in markets, most companies give out lavish bonus.
As a result, this reduces a considerable amount from the war-chest in times of need.
So, the best policy is to create a fund that will help you tide over most emergencies.
That way, you are better prepared to deal with exigencies.
It also creates a goodwill amongst employees.
Keep A Close Watch On Your Margins
For most small businesses, it is impossible to predict an inflationary situation.
In fact, for many small businesses, this is absolutely a new concept.
For many, it will be the first time they will face it, whenever it happens.
Therefore, in this situation, watching your margin can offer you the best protection.
As inflation starts creeping up, these margins tend to get pinched first.
The eventual impact follows much later.
But if you are an astute business person, you will look at these waning margins as a warning sign.
Many times, you need to go back to the basics of doing business.
A conservative business policy is what will make the day for you.
It will mean that you will be watching your leverage and margins closely.
That way, your risk appetite will lessen, but at the same time, your relative standing in the market improves.
You are better poised to tackle an emergency if it strikes.
In many ways, it will mean that you may not see an astronomical surge in your business.
On the contrary, you will follow the tortoise pace of sure and steady growth.
Therefore, surviving during inflation can be tricky for small businesses.
They will have to balance business growth with relative market uncertainty carefully.
Investment and borrowings too have to be managed carefully.
Often, this will mean that as an entrepreneur, you will have to make tough calls.
But in the end, it is the business that should take prominence.
The core concept is being prepared for difficult times.
Inflation should not hit you like a hurricane.
Instead, you should be the ant preparing for winter.
You need to be well prepared with supplies and potential Plan B when inflation does hit.
That way, your business will not succumb to the woes triggered by inflation.
It will come out stronger from the inflation cycle.