Setting up a new enterprise can be both exciting and daunting. You’ll have a lot to think about, but one thing you may not have considered is the impact of inflation on your new enterprise. Open up any newspaper or watch any news report. The higher inflation rates are likely to be a talking point.
How should new entrepreneurs navigate their new business amid rising interest rates? Here are eight things you need to know:
1. Increased Prices
The first way inflation can impact new entrepreneurs is the increased prices in the marketplace. If you are a producer, you may need to budget for the higher cost of raw materials. You need to consider what you need to buy to make your items and look at the price of each component. With higher inflation rates, you could be paying 5% to 8% more for your raw materials, which you will need to factor into your pricing and business plan.
Even if you are not producing a physical product and instead offer services, your enterprise is not immune to the increased prices. You’ll need to consider the additional cost of heating, lighting, gas, and all the other essentials for your workplace.
2. Labor costs
Higher inflation will also impact wages. With the cost of living increasing, workers are more likely to demand higher wages to compensate for the disparity. If your enterprise employs a team or outsourcing any aspect of your business, you will need to look at your labor costs. If you cannot pay higher wages, you will need to anticipate staff attrition or pilfering, as found this study, which will impact your bottom line.
Another aspect of labor costs is the risk of a drop in employee productivity. If you’ve already agreed on rates for your team or freelancers, there is a chance that they will feel less motivated if you cannot increase their wages. This means that even if you keep your labor costs to the same level as your original business plan, you could suffer efficiency issues and produce fewer products, reducing your income/expenditure balance.
3. Currency fluctuations
Even if your enterprise is not a massive importer or exporter, it could still be hit by currency fluctuations. If you purchase raw materials or goods overseas or have overseas freelancers paid in local currency, you will likely find that your dollars don’t stretch as far. While you may have agreed on a rate with a weaker currency, you’ll be paying more. You will need to account for these increases in your enterprise cost analysis.
4. Borrowing limitations
Borrowing is also subject to the whims of inflation. Many lenders are aware of the increased risks within the market and will increase their rates. Additionally, the Federal Reserve uses interest rates to curb rising inflation. The Fed typically increases the base interest rate to address higher inflation rates and return them to optimal levels. Unfortunately, this rate increase is passed on to personal and business customers.
If you need to borrow funds for your enterprise, you may find that loans are cost prohibitive. Additionally, lenders may be more hesitant to offer loans to new businesses, so you may struggle to qualify with a limited financial track record.
If you already have a business loan for your enterprise and it is not on a fixed-rate deal, you will need to factor the higher interest costs into your expenses. Variable rate loans are subject to rate changes, so you are likely to have your lender contact you to let you know your new rate and when it will apply. This makes it very difficult to budget for your typical monthly expenses as your loan repayments could be higher from one month to the next.
5. Tips to lessen the impact of inflation on your enterprise
Fortunately, there are some things that you can do to lessen the impact of inflation on your new enterprise:
6. Reallocate your business capital
While having cash on hand is a good thing to address any issues that arise with your enterprise, when inflation rates are high, having lots of cash sitting around is not a good idea. The buying power of the dollar is reduced when inflation is high. Let’s say you had $10,000 last year that could buy X number of products. The following year, the same $10,000 would only cover the cost of fewer items.
This means you’ll need to think carefully about what to do with your business cash. If you don’t want to tie up your funds, as you may need access to them, consider a high-yield savings account or short-term bond. While this may not be as inflation-proof as the stock market or real estate, you won’t sacrifice liquidity.
7. Negotiate in the dollar
If you are outsourcing to freelancers or workers outside of the U.S., make sure that you negotiate rates in the dollar. Regardless of currency fluctuations, you will still be paying the same amount. This will eliminate some of the uncertainty, and it will allow you to budget for your costs.
8. Evaluate your expenses
Finally, evaluating your enterprise expenses is one of the most effective strategies to lessen the impact of higher inflation. Have a serious look at all your costs and operating expenses. There may be areas where you can make savings, so you can create a buffer to compensate for any increased costs.
It may be worth reassessing where and how you source raw materials. It may be able to find a better deal or set up a fixed-rate contract to protect against increased costs soon.
While higher inflation is daunting, being prepared is the best possible defense against the potential rising costs. With a proactive approach, you can address the potential implications of higher inflation. This will allow you to continue your enterprise with minimal disruption and allow you to weather possible financial storms to succeed with your operation.