It is no secret that the last 10 years have been any startup owner’s dream, inflation has not had any drastic impact on startups, but things are about to change.
The technological revolution has reduced the costs of starting a business; previously, you needed to acquire real estate, machinery, and sales personnel. Today you can run a company from the comfort of your own home, as long as you, or someone on your team, has the ability to code. You don’t even have to worry about maintaining a compliance diary as some of the best registered agent services include this in their standard offering.
But what has led more people to starting your own business? The low employment rate in the US is one of the top motivators.
Before the current crises the US unemployment rate was 3.5%. Over the years there was no inflation, but the impact of the COVID-19 pandemic may change this stability.
From the standpoint of startups and small businesses, there are three factors to consider:
- The impact of inflation on startups
- If your startup can survive inflation
- How can a startup be protected against inflation
The most basic definition of inflation is a continuous rise in the price of goods and services regardless of economic activity.
How will inflation affect startups
The first thing that will affect your startup is input costs. Input costs refers to anything and everything you buy on a regular basis for your business. This also includes general expenses like water and electricity. Your input costs will differ according to the industry you are in. For example, if you own a butchery, then your input cost will be the machinery you use and the meat you source.
The next factor that will impact startups is the rise of salaries. As inflation rises, many governments may mandate businesses to raise their salaries. Even if it is not mandated, the living cost of employees will become more expensive, which will result in them asking for a raise. In order to keep the employees satisfied and to improve office morale, a raise is the only option.
Another factor that comes to play is the rise of taxes. If your costs rise, you’ll have to raise your prices as well. That means more turnover and, if you’re lucky, more income. The higher the income, the higher the tax. Tax is paid in brackets. If your businesses income increases, there is the possibility of moving to a higher tax bracket.
Unfortunately, you are not actually earning more; this is simply the result of inflation. However, unless the government changes the tax brackets, you will end up paying more taxes.
Inflation does not only affect the startup, but it causes consumer behaviour to change. Once spending power drops, consumers prefer to save money instead of spending it. The purchase of unnecessary goods is avoided when their prices become too high. This caused a decline in demand.
If consumer demand falls, your startup may be forced to reduce production. People may resort to bulk buying if prices rise unexpectedly. This type of consumer behaviour can lead to market shortages that are unnecessary.
How to protect your business
Forbes writes that the way inflation affects your business would depend on if you are a buyer or a seller. If you are a seller, you need to shorten your credit cycle. Because the value of your credit will depreciate over time, getting paid as quickly as possible should be your goal. If you are a buyer, it changes. If you wait too long to pay, the price of the product you want to buy will increase. Negotiate a long-term credit line with your bank; due to increased revenue from inflation, it will be easier to pay off your loan in the future.
The problem with inflation is that it is nearly impossible to determine when the inflation rising circle will stop. Inflation causes startups to be more unstable and can lead to a lot of uncertainty. Therefore it is important for a startup to make future plans, whether inflation will continue or not.
A new entrepreneur is normally focussed on the positive aspects of the business. It is new, it is exciting, but it is necessary to anticipate challenges that may occur. After all, the corporate world is subject to the economy’s whims.