“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” -Sam Ewing
Inflation is a highly debated topic in India as fluctuations in inflation rate sometimes scare consumers and sometimes give them a breather. The cyclical nature of inflation is due to various economic factors playing tug of war such as crude oil prices, food prices, money supply alongside banking regulators trying to maintain a median inflation rate.
The types of inflation are technically termed as demand-pull inflation and cost-push inflation.
Demand-pull inflation happens when high demand for products has steeply increased their costs. Cost-push inflation happens when high costs of amenities such as crude oil or food have increased production costs of commodities.
In India, steady increase in imported crude oil prices and monsoon dominated agricultural practices routinely inflate raw material and transportation costs.
According to a recent study, the inflation rate in India averaged at 6.68 percent from 2012 until 2018.
It reached an all-time high of 12.7 percent in November of 2013 and in June 2017 was at its lowest at 1.54 percent.
The Reserve Bank of India has a medium-term consumer price index (CPI) based inflation target of 4% and the government aims to maintain this stable inflation rate so as to allow for sustained economic growth.
Why Should Small Businesses Be Worried About Inflation?
Large businesses are better off in handling inflation owing to larger scales of production and operating margins, although they also need to keep appropriate checkpoints in place. It’s the small businesses that can get adversely affected as two major problems arise during high inflation periods.
One is the cost of credit goes up and second, the availability of credit shrinks. As an anti-inflationary measure, banks increase the interest rate to discourage businessmen from borrowing money so that less bank credit is created.
Banks buy securities from the Government using their cash reserves, hence their capacity to lend money decreases.
This further reduces the availability of loans for small businesses. In such circumstances, small businesses and start-ups run the risk of losing their liquidity and may find it very difficult to sustain business and growth.
How Can Small Businesses Stay Ahead Of The Inflation Game?
Here are a few ways small businesses can beat inflation!
1. Product Pricing
As a small business owner, ensure that you are aware of changes in competitor pricing as they may indicate a possible surge in inflation rates. The key is to steadily increase prices in small portions and in areas invisible to the customer (say in servicing charges if demand for this is high or reducing the quantity of product for the same price) rather than making a steep price rise.
This will have two effects:
- You are not scaring the customer away with a sudden price surge.
- You are ahead of competitors who just did so which means the scared off customer may indeed find you as the better option.
2. Inventory Costs
If you have estimated demand accurately, you can stock up on inventory when the costs are still low. This will allow you to gain a good profit margin considering the products get sold. But consider the possibility that due to inflation, customers shy away from buying your product altogether.
Idle inventory fetches nothing and this may be trickier to handle in the food industry where every commodity has a fixed shelf life.
In such a scenario the reiterated demand projection may help in estimating actually required inventory.
A method devised to handle inventory purchase more efficiently in the 1970’s was Just in Time manufacturing. Toyota used the JIT method to ensure it doesn’t buy inventory until it has an order. This would, of course, require extraordinary production standards and supply chain logistics to ensure timely delivery, but mastering this may help you stay ahead of the game.
There is pretty much no escape for small businesses even with the best inventory planning but to face the brunt of high or increasing inflation. High efficiency and scientific methods in planning will certainly diminish the losses.
3. People Management
If it’s that time of the year when your staff is expecting a raise and it’s also that time of the year when the market costs are surging upwards, then you have reason to worry.
Your balance sheet doesn’t look good and you don’t want to give them a raise. In all probability, your staff is facing the price rise challenge as well and is hoping for support from you. When they don’t seem to get that support, they may move on to another job, which most probably would be with your competitor.
You don’t want that to happen.
Instead, negotiate with your employees, give them the best possible raise you can offer, tell them the real deal. If you have been a good employer otherwise, it is likely for them to understand and stick with you.
4. Foreign Exchange
Higher inflation is usually correlated to a weaker currency, which may mean that you are earning more by exporting to stronger markets.
But your high inventory costs may be offsetting those profit margins. This generally depends on the ratio of sales to raw material and production costs.
Most likely, this may have a positive effect but one cannot depend entirely on a short-term situation such as this to create future projections. Hence, currency hedging may help protect against adverse currency fluctuations if you are dealing heavily in the international market.
5. Investment and Borrowing
The biggest mistake small business owners do is keep their money idle in business accounts that offer little or no interest. It is important to look for the best banking products offering good interest rates and invest in them.
This gives business owners crucial liquidity to invest in that furniture or equipment needed to upgrade the business.
In times of high inflation, if you want to invest money back into the business, make sure there is a good purpose to do so and it is going to increase profitability otherwise just hold on to the thought until markets loosen up.
Same goes for borrowing money. Loans may seem cheaper when inflation rates are low and you may think that returns would be higher later. But without a good reason to invest and a credible path to profitability, it may not be a great decision.
On the other hand, if you have a good reason to borrow a loan and invest in expansion, then don’t wait for a better time. When inflation rates are high, banks will increase interest rates to offset market risks as well as the depreciating value of money. They will be extremely cautious of borrowers and it will be harder to get a loan even if you have a good credit history.
The lack of borrowing ability may totally dry up liquidity in your business especially if it is dependent on such loans to fund inventory or operations. Many companies head towards insolvency at such times or curtail growth plans altogether.
The good news is India is on a high growth path as of today owing to the impact of GST, ease of doing business and strong domestic currency which will all help keep inflation low while giving a much-needed boost to small businesses.
Want to join the growth story? Get in touch with Gromor today to avail unsecured small business loans and embark upon a journey of growth!