There is a degree of confusion regarding the effect of inflation on an ecommerce business and whether it is a good thing. It is generally accepted, for example, that a moderate amount of inflation is a good thing for business and its cash flow. fastFACTR, a company specializing in debt factoring and other cash flow services, say that moderate price rises are an indication that the general economy is growing, and that demand is accordingly growing. This is because it encourages customers to purchase now instead of later, which in turn boosts demand.
How Much is Too Much?
Of course, once inflation becomes a little excessive it can begin to have negative effects on a business. However, it is important to note that these effects can be effectively managed. But it is crucial to know when you need to start taking steps to deal with excessive inflation.
Bearing in mind that other factors are indeed important, it is commonly accepted that an inflation rate of around 2% is getting into negative territory – or at least the territory where its effect upon the economy in general is considered to be negative. This does not necessarily mean that you can expect a negative effect on your business. Again, it all depends on several factors such as what you are selling, how sensitive to market trends your product is, what type of clients you have, and in turn how their own businesses are being affected by the inflation rate.
What To Do When Inflation Rises
So, if the inflation rate rises above 2% and persists in this increase, then you could be looking at some oncoming challenges. Naturally, the cost of your products will rise, which puts pressure on gross and net profits. Nevertheless, there are many other ways in which rising inflation will affect a business, so your best chance of weathering this particular storm is to be fully aware of them and to know how they are likely to affect your own business.
Here follows then some of the ways in which rising inflation can affect a business as well as what to do about it:
Higher Cost of Raw Materials
If raw materials are an important asset for your business, then rising inflation will see the costs of these rise. The only way to deal with this and see the same margin is, naturally, to pass these costs on to your customers. Remember though that lower-priced inventory can be exhausted first, so you can give your customers some warning and continue to sell at the old prices for a time.
Pressure to Raise Salaries
There is no two ways about it, businesses that do not raise wages in line with inflation run the risk of losing employees. You might think that this can simply be tolerated, and new employees brought on at the same wages, but remember that there are also the costs of training and recruitment to face too. Therefore, it is better to keep your current employees happy.
Higher Risk of Bad Debts
Clients that were previously secure might no longer be under new inflation conditions. Accordingly, it is well worth looking out for signs that your clients might soon become bad debts. The key is to foster clear and honest communication as well as a degree of trust. That way, you can be honest with them about the rising prices – and they can be honest with you about how it affects them.
Ultimately, inflation that is rising too quickly is bad news for everybody, but there are certainly means of weathering the storm.
