{"id":3265,"date":"2022-06-22T16:31:31","date_gmt":"2022-06-22T21:31:31","guid":{"rendered":"https:\/\/www.northone.com\/blog\/?p=3265"},"modified":"2023-05-12T22:21:09","modified_gmt":"2023-05-13T03:21:09","slug":"how-inflation-impacts-businesses","status":"publish","type":"post","link":"https:\/\/www.northone.com\/blog\/small-business\/how-inflation-impacts-businesses","title":{"rendered":"How Inflation Impacts Businesses in the US"},"content":{"rendered":"\n

Inflation is a big buzzword in 2022 which is important to understand especially as a business owner. Understanding inflation will also help you plan for it accordingly. If you own a small business or are thinking of starting one<\/a>, you need to learn how inflation may affect your venture. <\/p>\n\n\n\n

Let\u2019s dive deeper into inflation: what it is, how it affects small businesses, and the challenges it presents in 2022. Plus, we\u2019ll explore some tips on how to structure your business\u2019 finances to lessen the impact of inflation.<\/p>\n\n\n\n

<\/span>What is inflation?<\/strong><\/span><\/h2>\n\n\n\n

Inflation occurs when the price of goods and services rises, lowering the purchasing power of the dollar\u2014and the potential profits of businesses<\/a>. For example, say you\u2019re able to purchase 100 Widgets for $100. If, a decade later, your $100 only buys you 50 Widgets, you effectively have 50% less purchasing power. This is a very basic, simplified look at inflation. The cost of Widgets went up, which drove your buying power down. <\/p>\n\n\n\n

Each year, the United States\u2019 inflation rate hovers around 2-4%. This is considered \u201chealthy\u201d inflation, because it means the value of goods and services are increasing as the economy expands. However, in 2022, we\u2019ve seen monthly inflation rates above 6-8%,<\/a> which means prices are rising too high too fast. <\/p>\n\n\n\n

Inflation affects markets and sectors differently. For instance, the cost of building products rose by more than 30% between 2020-2022<\/a>. Meanwhile, the cost of food products rose at about 16%<\/a> over that same time period. <\/p>\n\n\n\n

<\/span>How does inflation impact small businesses?<\/strong><\/span><\/h2>\n\n\n\n

Inflation affects every business, big or small. Specifically, it affects the Cost of Goods Sold (COGS) for a business<\/a>. For example, if you buy raw materials to make Widgets and the cost of those materials rises, it now costs you more to produce Widgets. You\u2019ll need to sell them at a higher price to justify the higher COGS\u2014or, lose your margins by selling them at the same price. The same goes for service-based businesses, as well. As prices rise, so does the cost of human capital. You need to pay people more to work so they can afford the rising cost of goods. <\/p>\n\n\n\n

For small businesses, inflation can quickly cause problems. Small businesses can\u2019t lean on economies of scale like larger companies can, and they might not have the strong cash flows or reserves of more established companies. To tackle inflation in business, smaller companies need to act nimbly and operate efficiently. If the impact of inflation is to drive prices up, small businesses need to find ways to bring it down. <\/p>\n\n\n\n

<\/span>What can you do to offset inflation and lessen the load?<\/strong><\/span><\/h2>\n\n\n\n

Battling inflation can seem like a monumental task for small businesses. To overcome it, you need to first understand how inflation impacts businesses. Then, you need to look at your own situation to identify opportunities. Here are some tips for lessening the load:<\/p>\n\n\n\n