What Does Inflation Mean for Your Small Business?

We are entering a time of inflation.  Is this a disaster of Titanic proportions? 

Well, no.  The US has weathered times of inflation before.  Inflation is, some would argue, and natural part of the business cycle righting itself.  But it can be a threat to your business’ longevity if not managed correctly. 

During periods of inflation, prices for current inputs rise.  Raw materials, labor, contract services, rent, fuel and interest are all going to go up.  So, the prices you charge your customers must increase proportionately.  Otherwise, you are absorbing the hit; in effect, you are subsidizing your customers’ consumption. 

Will you lose customers because of these price increases?  Yes.   But they aren’t the customers you want, anyway.  Let. Them. Go.  Never compete on price.  Never.

Inflation has some hidden benefits.  Hard assets, such as real estate and durable machinery, tend to keep pace with inflation.  So if yours is a capital intensive business, that wave of unrealized capital gains can add to your net wealth. 

Inflation also makes debt cheaper.  This seems counterintuitive in a climate of rising interest rates, but because you are repaying the debt with cheaper dollars than you borrowed, the debt is easier to pay down.  (Especially if you have a low fixed interest rate.)

What we are talking about here is an arbitrary change in a value ratio (asset to dollars) that was arbitrary to begin with.  There is nothing magical about the price point of last year, nor is there anything particularly venomous about the price points of this year.  Just remember that the things you trade away for dollars must keep pace with the things you trade dollars for. 

So, as the press cackles “Inflation! Inflation!” like a flock of histrionic Henny Pennys, you can remain calm and realize this is just another sitch to be managed, like all the situations you manage in your business every day. 

Hang tough.

Kate