Small Business
What is inflation and how it affects businesses

By now, most of us have probably felt (or at least noticed) the significant increases in the cost of living, be it in our groceries, utilities, or mortgage repayments. And while an overall increase in prices over time is generally expected, it’s safe to say the recent surge was well beyond our expectations. Inflation can be challenging for small business owners to navigate, as you are faced with increasing costs to keep your business running, and the need to possibly make some tough decisions. So what does inflation mean when you run a small business, and how can you help safeguard your business against the impacts? Let’s look below…

What is Inflation ?

Inflation occurs when there is a general increase in prices, and a fall in the value of money. In Australia, inflation is measured using a percentage change in the ‘Consumer Price Index’ (CPI), which represents the cost of a basket of typical goods and services households buy. While a moderate level of inflation can be positive and representative of a booming economy, excessive inflation can have serious consequences on individuals and businesses.

What causes inflation?

Inflation can be caused by several factors, and it can be caused by both local and global forces. For example, the recent increases in petrol prices were a direct result of the war between Russia and Ukraine. On the other hand, extreme weather within Australia caused a serious shortage in fresh fruits and vegetables, driving up their prices. Other factors which can drive inflation include increasing wages, increase in demand, increase in money supply, as well as devaluation in currency.

How does Inflation affect small businesses?

There are several ways inflation can affect small businesses, and it goes beyond simply paying more for your supplies. Here are some of the consequences of inflation which can have a significant impact on small business owners.

Labour Shortages

Labour shortages can be both a driving force and consequence of the current inflation pressures. While reduced migration and closed borders during COVID-19 initiated the current shortages, the great resignation which took hold (as well as in many other countries) helped drive up wages substantially. This created a cycle whereby increasing cost of living led to many employees changing jobs in a quest to increase their own income. If you run a small business, you might have already experienced some staff resignation, or found that employees are negotiating higher wages when recruiting, and this is certainly reflective of the present environment. While this is a macro trend which might not be in your direct control, focussing on employee retention and non-monetary benefits you are able to offer can help ensure you keep your current staff satisfied, and prevent your business from struggling seriously from the shortage in staff. To learn more about getting your business through a staff shortage, read our article here.

Increased Cost of Materials & Supply Chain Issues

Logistical bottlenecks and increasing petrol prices have all helped to drive up the cost of raw materials, and this has been another driving force behind the current inflation pressures. As a small business owner, there is no doubt you’ve seen substantial increases in the price of almost all your supplies and have already seen the impacts to your bottom line. Even if you run a service-based business, and do not rely on any physical supplies, with rising inflation also applying to electricity, the situation may not be all that much easier for you.

How to help protect against inflation

While inflationary pressures are not within your direct control, some sound assessment and tweaking to your business’s overall finances can help to lessen the impact of inflation to your small business’s bottom line. Here are few boxes to tick to help you lessen the impact of inflation:

Performing a Break-Even Analysis

While increasing inflation is likely to eat into your profit margin to some extent, your initial focus should be on making sure your business doesn’t start running at a loss. Conducting a break-even analysis can help you get an idea of the revenue you need to bring in to make sure your business doesn’t run at a loss. This will then help inform steps you take to prevent your business from running at a loss. To find out how you can work our your business’s breakeven point, read our article.

Cash Flow Forecasting

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Raising Prices

Regardless of how much you cut costs in your business, there may come a point where you must raise your own prices and pass on your increasing prices to your customers. Raising prices might of course cause some dissatisfaction amongst your customers, but the good news is, in the current environment, your customers probably will not be surprised, so it’s unlikely you’ll receive a lot of backlashes as a result. It is still important to ensure you apply all the usual principles, such as including some form of communication and considering offering discounts for multiple purchases.

Get Professional Assistance

Lastly, you might live and breathe every part of your business, but this is certainly one of the times when having a fresh set of eyes to look over your finances would be a great help. Consulting with a professional such as an accountant to audit your business’s expenses can help provide new perspective and help guide your decision making.

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Aon has taken care in the production of this document and the information contained in it has been obtained from sources that Aon believes to be reliable. Aon does not make any representation as to the accuracy of the information received from third parties and is unable to accept liability for any loss incurred by anyone who relies on it. The recipient of this document is responsible for their use of it.