The term inflation refers to the increase in the prices of goods and services. It is usually caused by the decrease in the purchasing power of a currency. More often than not, when discussing this topic, people think of its effects on consumers. However, the impacts of inflation are usually widely felt. In addition to consumers or individuals, businesses and countries are also normally greatly affected by the situation. Below are some ways in which businesses are usually affected by this state of the economy.

Negative impacts of inflation

Note that the impacts can be both positive and negative. However, more often than not, the negative impacts are usually more common and profound. Below are some of these adverse impacts;

Increased product prices

The decrease in the purchasing power of a currency results in rising prices of goods and services. This impact is a significant part of the definition of inflation. The cost of goods and prices increases due to numerous effects like increased production cost, which will be discussed later on. Even companies or businesses that outsource the production of their products feel the impact as they have to pay more to acquire their goods and services.

Increased borrowing costs

Many businesses operate by borrowing loans and funds from various lenders or organizations. These loans help business owners start and operate their businesses. One of the great impacts of the increase in a currency’s purchasing power on businesses is that it increases the cost of borrowing. Formal lending institutions like banks naturally increase the interest rates of their loans. This is usually done to counter the inflation rate. The increased costs of borrowing result in businesses having to pay back more or almost all their earnings. This affects their revenue and general operation.

Decreased sales

Another adverse impact of the increase in a currency’s purchasing power on businesses is that it lowers consumers’ purchasing power, hence reducing sales for businesses. The increased prices for products discourage clients from buying as much as they used to or at all. This impact is especially felt by businesses selling non-essential services and goods. More often than not, consumers will choose to forego luxuries and minimize on the quantities of essential goods and services as a result of increased prices. The low business activities end up affecting the overall economy significantly.

Decreased purchasing power

The continued price increases also results in the money in consumers bank accounts loses its value. This means that it gets less purchasing power by the day. This also results in lower sales for businesses.

Foreign exchange

A lot of businesses acquire their products from other countries. In such a state of the economy, the cost of international purchases increases. This is because the purchasing power of your currency is diminished. This situation drives up the cost of importing raw materials, finished products, and other manufacturing components. However, this can also be a good thing for the countries whose currencies have a greater purchasing power. This is because they get to make more profits as they acquire products for lesser money and sell them for much more. However, the businesses in states on the receiving ends of the adverse impacts.

Increased costs of running a business

It also causes the overall cost of running a business to increase. For instance, it causes an increase in the cost of production. This happens because the prices of raw materials, transportation, labor, and supplementary services also increase. This is also one of the reasons why businesses eventually increase the prices of their goods and services. As mentioned before, increasing the prices of products lowers the sales and affects the economy.

Inventory shortages

It can also trigger disastrous inventory shortages. This happens when a business’s inventory for goods sold does not cover the cost of replacement. For instance, if a hike in the cost of production hits right before a business has to bring in a new inventory, there may be a problem. The problem here is that the amount of money made selling the other goods may not be enough to cover a new inventory because of the difference in prices. Companies can respond to this by only ordering products when they have an order. This way, they do not need a lot of money for inventory. However, this is a risky move as a slight delay in production can cost you a potential client.

Employee wages demands

One of the primary costs of running a business, for most companies, is employee wages. For this reason, employees often suffer more than businesses when inflation hits. Inflation forces businesses to increase their employee wages. This is because as the cost-of-living increases, it is only right to increases employee wages so they can survive the current state of the economy. However, a lot of businesses have a hard time doing this because of the decreased revenue, increased cost of production, and other adverse impacts of the situation. Failure to increase employee wages results in a lot of employees quitting and seeking other employment avenues. This also affects the overall success of the business.

Positive impacts of inflation on businesses

The impacts of the increase in a currency’s purchasing power on businesses are not only negative. It is worth noting that if the central banks maintain control over the situation, the impacts can be positive to businesses as well as the economy. Some of these positive impacts are;

Increased investing activities

While the increased borrowing rates can affect businesses adversely, they can also work to some businesses advantage. For instance, investors can benefit from the increased interest rates. Businesses with surplus cash can resort to capital investment ventures that would help them increase their revenue. Therefore, the increased interest rates help encourage a lot of businesses to maximize on investing activities.

Increased profits for specific industries

Another positive impact of inflation is that some businesses in specific industries can increase their profits. For instance, businesses selling essential goods and services can increase their profits by adjusting their prices. This means that even if the quantity of purchases by consumers decreases, they can recover by increasing or adjusting the prices to these effects. This way, they either do not suffer or benefit from the situation.

Final words

Businesses can reduce the chances of revenue loss and other adverse impacts of this economical situation by proper planning. For instance, they can start gradually increasing the prices of their products. This will help them avoid sudden price hikes, which tend to deter clients from purchasing from them. This is especially the case if clients do not respond similarly. Businesses can also survive this economical situation by adapting and coming up with innovative ways to sustain themselves. Contact us to prepare your business.

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Georg Tichy

Georg Tichy is a management consultant in Europe, focusing on top-management consultancy, projectmanagement, corporate reporting and fundingsupport. Dr. Georg Tichy is also trainer, lecturer at university and advisor on current economic issues. Contact me or Book a Meeting