Ideas to cope with rising inflation as a business

24 Feb 2022

Inflation in the UK is running at a multi-decade high of 5.5%, placing considerable pressure on businesses, snaring them in a vicious cycle of rising prices to cover the increase of input prices. If clients can’t afford your costs, they might put off a purchase, spend less, or visit your business less.

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What are the measures you can implement to cope with rising inflation? Are there funding options you could consider to manage the effects? Indeed, could you even use the rise in inflation to your advantage? Let’s examine the factors that cause inflation to rise and explore some Funding Options.

Current inflation data in the UK

In January 2022, the UK’s ONS (official national statistics) reported that annual CPI inflation (consumer price inflation) had reached a thirty-year high of 5.5%. Inflation hasn’t been this high since 1992, when it stood at 7.1%, as Britain emerged from a long period of inflation-feeding high wage deals. 

But that’s just CPI inflation. RPI (retail price inflation), which relates explicitly to the cost of retail items we buy daily and most, is currently 7.8%. 

Regarding forecasts, respected analysts quoted in the Financial Times Advisor suggest we could see CPI reaching 7.4% and RPI reaching a staggering 10% by April this year. The Bank of England predicted inflation to peak at 7.25% in April before subsiding.

The suggestion is (if current trends are maintained) that consumers will have to find an extra £1,537 a year to support their current lifestyles, and that’s before we factor in the estimated 50% rise in energy costs from April onwards.

The origins and economics of inflation

You can’t control inflation because it’s out of your hands; you can only cope with the impact on your business. We know the current inflation phenomenon in the UK is because of demand-supply pressures due to the pandemic, supply chain issues and Brexit.

Securing raw materials and services has cost more as the global economy cranked back into life. In the UK, costs have also increased exponentially as the country lost some of its tariff-free access to the European Single Market.

An increase in the money supply can cause inflation. Due to the fiscal and monetary stimulus governments and central banks introduced to cope with the pandemic, this is undoubtedly one of the many factors causing inflation to rise. However, there are two other principal factors more relevant to our businesses.

 1: Demand-Supply Rule

Excessive demand and lower supply cause the inflation rate to increase. When an economy or business cannot meet the consumers’ market, prices of goods rise, causing inflation.

 2: Cost-Push Rule

In a cost-push rule, the production costs of goods increase. Eventually, businesses have little option but to increase the prices of goods, which lowers consumer purchasing power, causing a further rise in inflation.

How to minimise the impact of inflation on your business

  • Look to reduce your borrowing costs early 

In a controlled and low inflation environment, interest rates remain low. But if inflation continually rises, central banks typically increase interest rates to counter inflation, with commercial banks following suit. Your business might experience an increase in borrowing costs if interest rates rise, and it might be a suitable time for you to fix your borrowing costs.

  • Look for customers ready to spend now

Higher interest rates aren’t always a negative issue. Businesses with surplus cash might invest in capital investment projects previously put on hold. Your customers might now decide to invest in a project before prices rise.

  • Increase your sales

Your customers might be inclined to spend less than previously, and you could experience slower sales. Your challenge is to increase sales volume but keep your selling costs unchanged. This way, you can minimise the inflationary effects on your buy-side, ensuring a steady sales increase while keeping your prices down.

  • Lower your production and overhead costs

When inflation rises, so does the cost of production. Businesses will inevitably raise their prices to meet the rising costs of raw material, administrative overheads, and transportation costs.

The logical step here is to look at your expenditure. What can you do to lower or keep a lid on your production and overhead costs? For example, why not audit your energy costs to see if there’s a better option available. Or perhaps look at lowering your insurance costs?

  • Attach wage rises to improved performance

Wage rises tend to shadow rising inflation, leading to customers having more disposable income if the wage rises are higher (in percentage terms) than the inflation rate.

However, this can represent a challenge to an employer because staff will experience inflation in their own lives and might need a corresponding wage rise. You can mitigate this issue by opening a dialogue with your employees and perhaps agreeing to a staged wage increase if targets are met.

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Positive effects of inflation on business

If investment banks and financial services can increase profits with increased interest rates, why not yours? Certain businesses could raise their prices to adjust to inflation while improving their bottom-line profitability.

  • Increased consumer spending

Central banks increase interest rates if inflation gets too high, with investors enjoying a higher return on their investments. Consumers can theoretically spend more. So, perhaps stage a targeted campaign aimed at your high net-worth clients. 

  • Increased business growth

When consumers anticipate inflation and rising prices, they might stockpile or spend early on larger consumables. So, could you now look to your orders pipeline and use the issue of inflation to close deals? 

Can you state to a sales prospect that your prices are likely to rise soon? However, you’ll honour the quote if they commit to business today?

Protecting your business from the effects of inflation

You can also take preventive measures to limit the impact of high inflation rates by looking at the following factors and making adjustments. You can get ahead of the curve if you’re proactive and turn the situation to your advantage.

  • Managing your business debt

If you’re concerned that inflation is rising and borrowing rates might follow suit, it might be the opportune time to reassess your loans to see if you can get better terms. Debt or asset refinancing can be a wise choice to consider during such times.

  • Inventory management

You might want to examine your inventory and stock management during rising inflation. For instance, can you buy in bulk to get discounts and limit potential price increases for your customers? This can be an extremely effective strategy if you have the funds in reserve. If not, you could consider specific stock financing options.

·      Cost of production

Rising inflation rates increase production costs for businesses. Still, you can limit the impact through trade finance, efficiently negotiating discounts with suppliers, and applying your working capital appropriately.

  • Price changes

Most businesses pass on the adverse effects of inflation to consumers. However, if you employ better budgeting and forecasting methods, you can navigate the impact and profit while generating goodwill with your client base. If your prices remain stable but your competitors’ rise, this can afford you a tremendous advantage.

You could also advise your customers that your prices are rising but only in line with CPI inflation. If you clearly explain the need for the rise and the impact inflation has on your business, clients might well be sympathetic.

What funding options can you use to counter the effect of inflation?

You can minimise the overall effect of rising inflation if your business manages its inventory better. You could use working capital, an overdraft or specific stock funding to cope.

Here at Funding Options, we can help you navigate the financial landscape, guiding you step-by-step through the entire process and ensuring you get the best possible deal. 

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Stuart Lawson

Chief Commercial Officer

Stuart is Chief Commercial Officer at Funding Options where he plays a key role in driving the growth of the business and its relationships with more than 120 partners. A finance industry veteran, he has a strong background in alternative finance, corporate and commercial banking, as well as global transaction banking.

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