High inflation: What does it mean for your business?

High inflation is hitting businesses and households hard in 2022. Across the world, inflation is running high, due to pandemic disruptions, monetary stimulus and supply-chain issues.

Broadly speaking if inflation is too high:

Consumers’ purchasing power – the real value of money – is reduced. If prices are increasing faster than people’s nominal incomes, they will be able to afford fewer goods and services over time.
Workers may then seek larger wage increases to compensate for the effects of higher inflation on their purchasing power. In turn, higher wage growth raises firms’ costs, which may lead firms to raise prices further and/or reduce the number of workers they employ.
Spending and investment decisions may be distorted. This is because high inflation can influence when households make purchases or businesses make investment decisions. For example, if households expect higher inflation, they may make purchases sooner than originally planned to avoid paying more.

You’ll see the effects of inflation at the supermarket and the fuel pump – and in your business. So, what exactly does high inflation mean for your business?

Eroding your buying power

Inflation increases prices, which eats away at your buying power. For business owners, that means you’ll encounter higher costs from your suppliers. Materials are more expensive, transport has become far more costly, and basics from office supplies to utilities are all rising in price.

In addition, your staff are probably asking for pay rises. For you and your employees to keep up with inflation, your income needs to increase by at least the same amount as inflation. To achieve that could mean a seriously large wage bill increase for your business.

Rising interest rates

Central banks try to keep inflation at a sustainable level. They react to high inflation by raising their interest rates, which slows the economy and puts a handbrake on inflation. As a business owner, you’ll see this reflected in a higher cost of borrowing, and the same will apply to your home loan.

We have recently seen this in action with the Reserve Bank of Australia (RBA) increasing the cash rate target from 0.10% to 1.35% in a couple of months. Which could mean that your business loans are going to take longer to pay off and cost you more in interest charges.

It’s time to raise your prices

With inflation causing you to spend more, your business will also need to raise prices. This is always a sensitive topic to tackle with clients and customers, but at least the way has been paved for you by prices rising across almost every single sector and industry. If you’re wondering how much you need to increase prices in order to keep up with inflation or maintain your margins, do give us a call. We can run the numbers, test out scenarios and figure out a sweet spot that will work for your business.

As accounting experts and small business experts, we have helped numerous clients just like you grow regardless of inflationary pressures. Contact the team today to discuss a business plan that will work for you.
(03) 9374 8400