Inflation, the rate at which the prices for goods and services increase, affects businesses and consumers alike. The impact of this unavoidable economic phenomenon necessitates the adoption of budgetary adjustments for nearly everyone.
The price of products and services doesn’t always increase uniformly across all commodities, sectors and consumer categories.
There are some classes of goods and services where inflation can influence nearly every step of production. For example, as the price of fuel increases, the price of any goods that must be shipped long distances will increase.
However, other inflationary pressures will cause some shipped products to increase more than others.
An outbreak of avian flu, increasing feed costs and rising fuel prices will drive up the cost of chicken and eggs for consumers.
At the same time, the price of cow feed may remain static. Ranchers might not be affected by an outbreak of a dangerous contagion like mad cow disease or a similar disaster that necessitates mass culling.
In that scenario, the price of hamburger, steak and milk may only increase slightly due to increased fuel costs, while the price of chicken and eggs might double.
The variables that influence the cost of goods and services are manifold, and there’s almost never a monocausal explanation. Unfortunately, from the perspective of businesses, the why of inflation doesn’t really matter. There’s likely nothing you can do about the causes, but you can control your reaction to it.
How you respond to inflation should be tailored to the way in which it impacts your business. From a day-to-day perspective, these effects often take the form of:
· Changes in consumer behavior
· Increased material and overhead costs
· Increased labor costs
These changes might not hit you right away. There’s often a lag in inflationary effects, but they will eventually be felt and must be addressed eventually.
Inflation doesn’t just impact your net earnings – it can also hit your revenue. Consumers adjust their spending behavior based in large part on their purchasing power. If someone who earns $5,000 a month can only purchase $4,500 worth of goods due to inflation, they will typically refrain from some of their normal discretionary purchases, or they may buy lower-cost alternatives when shopping for necessities.
This is a tough question for many businesses to answer. It’s not sustainable to operate at a loss, which might happen if you keep your prices static while your expenses rise due to inflation.
Businesses typically have no choice but to pass their increased expenses on to consumers in the form of higher prices. Unfortunately, those consumers may have less money to spend on your goods and services, meaning they may be even less likely to buy your goods or services after you increase your prices.
Employees are consumers too, meaning they feel the same effects of inflation as your clientele. The best way to inoculate workers from the negative effects of inflation is with pay increases, meaning higher labor costs for businesses.
The Federal Reserve responded to this most recent patch of post-COVID inflation in one of the most predictable ways – increasing interest rates. If you need to apply for new financing or see the rates on existing credit lines increase, you will need to factor higher interest into your future budgets.
Alternatively, you may want to adjust your approach to financing. Rates will decrease when inflation is rising at a more manageable rate, which means many businesses will hold off on securing new financing until it’s more affordable. Businesses that need financing to weather periods of high inflation can also potentially refinance in the future when rates decrease.
Businesses in Phoenix often must make hard choices when deciding on how best to adjust to inflation. Many steer toward a middle ground where they increase the price they charge for their goods and services as much as possible without causing a catastrophic drop in demand. They may also increase salaries just enough to prevent workers from looking for new jobs.
Businesses seeking relief from inflation may consider shopping around for vendor alternatives that can offer better rates on inventory. Even if they don’t end up changing vendors, they may be able to use competing offers for leverage in negotiations with their current vendors.
Think carefully about the ways in which price increases will influence demand for your products or services. Does your business provide necessities or discretionary goods and services? What are your competitors charging?
Discuss scenarios and options with trusted employees, family members, your accountant or a consultant before making any significant changes that may be difficult to reverse.
Are you worried about inflation’s impact on your expenses, revenue and consumer demand for your products and services? Businesses in Phoenix that want budgetary advice and ideas for managing the effects of inflation should call H&H Accounting Services at (480) 561-5805. Our consultants would be happy to discuss your situation during a free one-hour consultation.
