Inflations Imact on New/Small Businesses

Inflation measures the increase of prices over a period of time and right now it’s probably the most important financial concern for small businesses in the country. At around 9%, inflation rates have reached the highest they’ve been for 40 years. Businesses can usually expect reasonably rising prices, in fact, the Federal Reserve aims to keep inflation around 2% every year. However, the sudden surge in costs can wreck any financial plans and lead to small and new businesses having to suddenly make massive changes to their business model just to stay afloat.

The causes for high inflation can vary widely, and the effects small business owners can have on them are minimal, but at the end of the day, your primary concern is how to maintain viability in such an environment. With that in mind, here we’ll take a closer look to see how inflation affects a new business and what they can do to alleviate the worst of it.

How Does Inflation Affect a New Business: The Causes

The current inflation crisis has a number of roots that have combined together to drive up costs. The first part of answering the question “how does inflation affect a new business” is understanding why it’s happening in the first place. Here are the main culprits for the sudden increasing costs:

Supply Chain Disruption

The global economy is a relatively free system with the global supply chain moving raw materials through several stages around the world until they end up as a final product.

An example might be copper being mined in central Africa, being sent to Australia for processing into refined wire, which is used to make a PC motherboard in China that’s finally sold in Minnesota.

Each company along the way has its lead-in times and ordering processes, but Covid-19 caused production and shipping in many countries to be drastically reduced. This created a domino effect on supply chains, reducing output at every level. It then meant that to get the same product needed to fulfill sales, companies had to pay more than their competitor, raising prices and passing the increasing cost onto consumers.

Lower Production

As well as goods simply not being able to reach their markets or manufacturers not being able to get the materials they require, there was also the fact that many factories shut down or greatly reduced production to cope with worker safety legislation. This meant that the normal amount of goods weren’t being produced, with companies running down stockpiles instead. When these ran out, prices rose in line with excess demand.

Too Much Money Chasing Too Few Goods

Another impact of Covid was that people had little to spend their money on — no eating out, watching live events or trips to Vegas. This built-up cash over lockdown burst like a dam when restrictions were lifted, with people wanting to spend the money they’d saved. Unfortunately, there wasn’t the stock or the basic capacity (think employees and business readiness) to cope with demand, leading to people being forced to outbid each other to get the goods and services they wanted.

Price Shocks

The knock-on effects of Covid-19 had already been tightening global supply, but the world might have gotten away with a soft landing before Vladimir Putin invaded Ukraine. This had a major impact on many core global inputs, with Russia being one of the biggest suppliers of oil in the world, Ukraine and Russia supplying ¼ of the world’s wheat, and Russia and Belarus supplying 40% of the world’s potash (a key fertilizer ingredient). Added to the uncertainty caused by such a large war in Europe, prices shot up as companies sought to secure their supplies.

How Does Inflation Affect a New Business: The Results

We’ve seen why inflation is happening, but what about the impact of inflation, and how does inflation affect a new business? Well, simple math would suggest the first issue is going to be the profit margin. If the costs of your materials, gas and other overheads go up, that means you’re going to be making less per sale at your current pricing. So, to maintain the same cash flow, you’ll have to look at finding new pricing strategies that will make you the same profit yet not price you out of business.

This is a tough tightrope to walk for any business at the best of times, but with prices going up everywhere, you’re not only competing with businesses in the same vertical but with every other industry as well. On top of that, as a business owner, your own purchasing power is also diminished. Say you were pricing your jobs to take home $1,000/month, that $1,000 with near 10% inflation now needs to be $1,100 to get you the same goods and services it did before.

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How Does Inflation Affect a New Business: Solutions

Apart from raising their own prices to match the higher input costs and their own reduced purchasing power, there might seem to be few enough options for a new business. However, there are actually a number of ways that a new business can alleviate the worst of the problems, namely by going down the route of a franchise business model.

The Screenmobile franchise system, for example, has a number of inflation-beating benefits for new businesses, such as:

No Premises Needed

Rents had been going up for a while, even before the current crisis, but how does inflation affect a new business in those terms and how can franchising through Screenmobile avoid it? Well, many new businesses need a premises to work from, either a location where you sell your goods/services or a shop for preparation. With Screenmobile, that’s unnecessary as your entire workshop is in your vehicle, where all the stock you need for jobs can also be stored, meaning you can completely avoid one of the largest costs for new businesses.

Low Overheads

Not only does not having to rent out an extra business premises mean you forgo that cost, but you also cut down on the other associated overheads, such as aircon, heating, cleaning and insurance. In times of high inflation, keeping your cost base as low as possible minimizes your exposure to the economic forces at play.

Franchise Supply Chains

When looking at how inflation affects a new business, one of the major structural causes we’ve seen is prices increasing at every level of the supply chain. With a Screenmobile franchise, you have the benefit of being part of a much larger buying group than if you were trying to source your materials yourself. With a secure supply chain, you can be sure of your costs, at least in the short term, which allows you to build a pricing and work schedule on a strong foundation.

Minimal Team

Inflation also means that higher wages have to be offered for staff to deal with the price rises, further driving up costs. Screenmobile franchisees, especially new businesses just starting out are often able to run their whole business with a small team or even no extra staff at all as owner-operators. The flexible nature of the franchise model means that you can choose a working schedule that makes the best sense for the business.

How Does Inflation Affect a New Business: The Results

Conclusion

The country and the world are currently going through the highest inflation in four decades. Understandably, many new and prospective entrepreneurs are wondering how inflation affects a new business. The answers are multiple, as are the causes of the price rises in the first place. However, a Screenmobile franchise can help you avoid many major issues. With your vehicle serving as your primary workstation, there’s no need to rent a premises, so you avoid that and the accompanying overheads. Also, as part of a much larger network of buyers, materials can be sourced at the best prices, leaving you less vulnerable to sudden price surges.

To find out more about how working with Screenmobile can be the best way to start your new business, you can read more about it here or get in touch with our team.