Inflation doesn’t just increase the prices of goods and services in an economy – there are other ways in which it can affect your business finances. Here are five unexpected ways inflation can hurt your bottom line.
Your profit margin
The profit margin is the difference between the cost of producing something and the price you sell it for. If inflation causes your costs to rise, then your profit margin will decrease – and vice versa if inflation causes prices to fall.
Here are a couple of examples of how inflation can affect your business finances:
If you have fixed assets such as buildings or machinery, these assets usually increase in value over time, thanks to inflation (theoretically). However, there’s no guarantee that they’ll increase enough so that they offset their higher depreciation expenses each year, due to wear and tear on those assets.
Or let’s say that all of a sudden people stop buying paper towels from you because they’re too expensive due to rising prices caused by inflation. In this case, it seems like bad news since fewer people are buying your product, but let’s think about this another way: what if everyone started buying more paper towels than usual because they were cheaper than before? In this scenario, there are two possible outcomes, depending on whether demand exceeds supply or vice versa.
Your debt
If you have a loan with an interest rate that’s fixed, but inflation is rising at 2% annually, then you’re losing out on potential savings in two ways: the amount of money owed increases over time and each payment gets smaller as well.
In other words, those two forces combine to make it harder for you to pay off your debt on schedule – and potentially even make some types of loans more expensive than they would be otherwise.
By understanding what causes inflation and why it’s happening in your economy at the moment, you can make an attempt at predicting whether there’s a solution in sight or whether the inflation will only get worse.
Your cash flow
If you sell products or services, you may have to pay more on your expenses. For example, if you buy goods that were less expensive in the past but now cost more than they did before, due to inflation, then it makes sense that your sales would be lower too – and this could mean a lower profit margin or even no profit at all.
In addition, businesses owners could see their share of income drop as well if wages continue rising faster than inflation rates, which means companies will likely have fewer employees who in turn can afford the higher prices, without sacrificing too much quality control over their products or services (and thus affecting both quality and price).
Employee pay raises and benefits
If you raise the salaries of your workers, they will expect similar raises each year. If you don’t give them what they want, they might leave for another job where their compensation is higher. And if this happens often enough, it could cause an exodus from your company that would be detrimental to its success.
In addition to salary increases, many companies offer benefits like health insurance coverage or retirement plans as part of their total compensation package; these costs can add up quickly over time as well.
One way to combat the need for paying more for employees that companies are starting to catch on to is tech automation. This can help reduce bandwidth and create process efficiency.
Preparing for inflation
In 2023, it’s expected that business will face a lot of challenges associated with prices of goods and services going up over time. This means your business’s profits will decrease over time as well.
To combat this trend, you can set aside a portion of your profits each year to pay for future inflationary costs so they’re not taken out of your company’s earnings unnecessarily. This way, when you do have to spend money on things like rent or employees’ salaries (which will increase due to inflation), at least there’s money left over for these expenses instead of having it come out of gross sales or profits, or from other sources such as advertising campaigns or product development budgets.
Setting aside money for inflation may seem like an unnecessary expense but if it helps keep cash flowing into your business through good times and bad without leaving any room for unexpected expenses further down the road, then it’s a good idea.
