Inflation is an economic phenomenon that can affect our daily lives in our businesses, as it causes costs to rise and profit margins to decrease. However, there are strategies that entrepreneurs can implement to reduce its negative effects. In this article, we will explore some of these strategies, what inflation is and how it affects businesses.
What is inflation and how does it affect businesses?
We can define inflation as the general and sustained increase in the prices of goods and services in an economy. In simple terms, the cost of your shopping basket increases from one month to the next!
It is measured through the consumer price index (CPI) or the producer price index (PPI). When prices rise, the purchasing power of the currency decreases, meaning that more money is needed to buy the same goods and services.
Inflation can affect businesses in several ways. On the one hand, it increases production costs as suppliers usually increase their prices in response to inflation. On the other hand, it can decrease profits as entrepreneurs cannot always increase their prices at the same rate as costs. In addition, inflation can also affect the value of the currency and generate exchange rate risk, which can affect international operations.
It is important to be prepared for price variations and to seek strategies to avoid the negative effects of inflation on your business.
“It is important to be prepared for price variations and seek strategies to avoid the negative effects of inflation on your business.”
Why does inflation occur?
When the demand for goods and services is greater than the supply, prices rise due to competition among buyers. This can occur when the economy is growing rapidly and there is more money available to spend.
Increases in production costs, such as raw materials prices or wages, can make products and services more expensive, leading to a general increase in prices.
Monetary policy, including interest rates and the amount of money in circulation, can affect inflation. If the central bank increases interest rates, it can decrease inflation, but it can also reduce economic growth.
External factors, such as fluctuations in raw material prices or changes in exchange rates, can affect the prices of imported goods and, therefore, contribute to inflation.
Some tips to survive inflation with your business:
Avoid superfluous expenses and improve costs:
When you read this first point, the first thing you will think is “well, I don’t have superfluous expenses!!!” Well, I’m sorry to tell you that I am almost sure that yes, but that you will only realize when you review them. In the day to day of our enterprise we are acquiring neglecting habits (especially in times of fat cows where the levels of sales and profitability margins allow it) that can make us save a lot of money and maintain our prices without increases for the customer or improve our profit margins.
How long have you been working with the same trusted suppliers without asking for other quotes to compare costs and commercial conditions? How long has it been since you reviewed the procedures to optimize them? Are there tasks that can be done in fewer steps? Is it possible to optimize the use of resources in some way? These are some of the questions we must ask ourselves. Here are some points you can review:
- Negotiate with your providers: You can try to negotiate prices with your providers to get better rates. You can do it by offering a long-term contract or buying in larger volumes than the current ones.
- Look for alternatives: If the prices of your suppliers are very high, look for alternatives. You can find cheaper suppliers or use cheaper raw materials. Be careful at this point, the client is always the center of your business and respect the positioning of your fundamental brand. Cheaper does not mean “lower quality”.
- Reduce your expenses: Review your expenses and try to reduce them where possible. You can do it by automating processes, eliminating unnecessary expenses and reducing labor costs.
- Invest in technology: Investigate in technologies that can help reduce your costs, depending on the characteristics of your venture, it can be anything from simply taking excel spreadsheets that help you order your income and expenses, creating an online store, a reservation system , to automation, robotics, artificial intelligence, among others.
- Energy efficiency: Implement measures to improve energy efficiency in your company, this can help you reduce your energy costs and save money.
- Outsourcing : Consider outsourcing some of your tasks or services to reduce your personnel and operating costs.
- Leasing: Evaluate the available options to see if this modality is more profitable for you or to acquire your own assets.
- Control your inventory: Make sure you have adequate inventory, avoiding having excess inventory as this increases your financial and storage costs. A priori, this point seems to contradict point 1, but the truth is that you will have to find the best balance between lowering costs for volume purchases and inventory maintenance.
Be careful with price increases:
This is a point that will have to be studied on a case-by-case basis because it will depend on the segment of the brand, what happens in that industrial sector, its position in the market and many more. But what I do want to highlight is that you do not get carried away by the inertia of the market. Do you think that it is what is best for your venture at this time, to increase the volume of sales? increase margin? Inflation changes some rules of the game, you have to make decisions with the new rules and not with the previous ones you were used to. Take the time you need to do your evaluation well.
Here’s how you can use innovation to reduce costs and improve your revenue:
- Innovative Products or Services: You can research and develop innovative products or services that offer better value to your customers. This can help you differentiate yourself from the competition and increase your prices.
- Innovative processes: You can research and develop innovative processes that allow you to reduce production costs. For example, you can use automation, artificial intelligence, or robotics technologies to improve efficiency and reduce costs.
- Innovative Marketing: You can research and develop innovative marketing strategies to attract more customers and increase your income. For example, you can use social media to reach a larger audience or use content marketing to attract potential customers.
- Innovative business models: You can research and develop innovative business models that allow you to generate income in a different way. For example, you can use the subscription model to generate recurring revenue or the “freemium” business model to generate revenue through upgrades or additional services.
- Evaluate financing options:
- In the same way that you will review the merchandise suppliers
- Evaluate financing options:
- In the same way that you will review the suppliers of merchandise and other inputs, you must review the suppliers of working capital. Is it convenient to finance with the bank? with partners? wait a bit and avoid taking financing?
- Here are some strategies for using financing to avoid inflation:
- Long-term financing: You can look for long-term financing, such as bank loans or equity investments, to help cover production costs and improve your ability to negotiate with your suppliers.
- Funding for innovation: You can seek funding to research and develop innovative products, services and processes that allow you to reduce costs and increase your income.
- Financing for expansion: You can seek financing to expand your company into new markets or to acquire new assets that allow you to increase your income and reduce your costs.
- Financing for investment: You can seek financing to invest in assets that allow you to reduce your operating costs and increase your income. These assets may include machinery, technology, intellectual property, among others.
- Security financing: You can seek financing to establish a contingency fund that allows you to face the risks associated with inflation, such as fluctuations in the prices of raw materials or changes in the exchange rate.
It is important to note that financing has a cost and must be used carefully. It is important to carefully analyze the financing options available and choose the one that best suits your needs and circumstances.
“inflation changes some rules of the game, you have to make decisions with the new rules and not with the previous ones you were used to.”
In conclusion, inflation can be a challenge for entrepreneurs, but there are strategies that can be implemented to protect yourself from its negative effects. Improving your costs, using innovation and using financing are some of the tools that can help avoid inflation. It is important to carefully analyze the available options and choose the strategies that best suit your needs and circumstances. Although it cannot be completely avoided, with proper planning and strategies, its impact on our business can be minimized and we can remain competitive in an uncertain economic environment.
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