EFFECTS Of INFLATION ON SMALL-TO-MEDIUM ENTERPRISES
Since the COVID-19 pandemic, inflation has been hitting SMEs hard. SME owners need to understand the effect of inflation on their business, and how to manage it because the fact is inflation happens all the time.
What are SMEs?
SMEs are small to medium-scale businesses whose employees face certain limits, these limits differ in each country. SMEs make up large shares of enterprises in any given economy and collectively employ more people than large companies.
What is inflation?
Inflation is the rate of increase in prices over a given period. Forbes defined inflation as a rise in prices and a decline in the country’s purchasing power. However, inflation isn’t always a bad thing, a small amount of inflation is good as it shows that residents of a country have good income which reflects a growth in the economy of that country. Countries like Rwanda, Chad, Maldives, and Gabon with inflation rates of -2.0%, -0.5%, -0.2%, and 0.6%, respectively have the lowest inflation rate in 2022, while Venezuela, Sudan, and Lebanon with inflation rates of 1198%, 340%, and 201% respectively have the highest inflation rate. The two extremes of inflation can weaken an economy.
EFFECTS OF INFLATION ON SMALL TO MEDIUM-SCALE BUSINESSES
The increased cost of production
The cost of production has rapidly increased. The shortages of raw materials greatly impact the cot. The pressure on supply chains leads to businesses having to pay more for materials and products. The shipping fee has also increased the cost of transportation. A lot of employees are also asking for a pay increase to compensate for increasing inflation.
Prices Escalate
As a result of the surging cost of production, SMEs have been forced to increase the price of their products and services to offset the rising cost. Any business aims to make a profit, you can only do that if you make more than you spend. Consequently, this can lead to customers buying less.
Increased overhead expenses
Inflation affects the cost of everything including things like energy, utility rent, and shipping fee. This can be a burden on SMEs as the cost of inventory starts to rise.
Narrow Profit margin
Rising costs affect profit margins. An increase in inflation could tighten the profit margin. Inflations make it difficult for SMEs to reach their margins and overall profit.
WAYS TO MANAGE THE EFFECTS OF INFLATION ON YOUR BUSINESS
The reality is that inflation is always happening; SME owners need to find ways to manage the effects of inflation on their business. Here are a few ways to counter the effects of inflation and keep your business up and running.
Monitor your cash flow
Small businesses should pay close attention to how money is being spent. Records should be kept on all purchases and sales as this will help you better in managing your business and keep it running. It’s good to save for the rainy days as this will keep you from being stranded. You can never what is going to happen at any time in the economy. For example, there can be an increase in the cost of materials, employee wages might rise, or even a disruption in the supply chain. Always makes sure you save ahead of any of these circumstances to avoid being caught unaware.
Stockpile inventory before inflation hit
The warning signs of an impending rise in inflation might be difficult to spot because the signs are not always clear. Stockpiling on inventory before suppliers increase their prices is a good idea. But make sure you don’t use cash reserve for this purchase. You have to be careful when you are stockpiling, always monitor the market to know if that would be profitable. It is profitable to keep your inventory at a minimum when prices are going to drop, so you keep them in line with the market.
Cut all non-essential costs
All expenses that are not essentially important to your business should be cut off. One way you can do that is to maintain customers. Attracting new customers through marketing can be expensive and downright unaffordable during inflation. So make sure you have great customer service to ensure that your existing customers keep coming back. It cost five times more to attract a new customer than to maintain an existing one.
Leveraging automation
Automating some of your business operations can help save money and time. Having software that helps you manage the inventory, books, and data entry can help you save money on manual labor. This greatly helps to reduce the amount of money you spend on labor in the long run.
Suitable business loans
Getting an affordable loan is a good way to improve cash flow in your business and cover an increased cost. Business owners can get loans early at a fixed A loan can help your business run smoothly without financial constraints. It can help you grow your business
CONCLUSION
Periods of inflation can be scary and certain for business owners, but a prepared business is more likely to survive such periods. As the market change, enterprises should review their mode of operation to counter whatever the economy might throw at them.
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