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Starting a new venture can be both exciting and daunting. You have a lot to think about, but one thing you may not have thought about: the impact of inflation on your new venture. Open a newspaper or view a news item. Higher inflation rates are likely to be a topic of conversation.
How should new entrepreneurs navigate their new business amid rising interest rates? Here are eight things you need to know:
1. Increased Prices
The first way inflation can affect new entrepreneurs is through increased prices in the market. If you are a producer, you may need to budget for the higher cost of raw materials. You need to consider what to buy to make your items and look at the price of each part. Of higher inflation ratesyou can pay 5% to 8% more for your raw materials, which you should include in your pricing and business plan.
Even if you don’t produce a physical product and instead offer services, your business is not immune to the higher prices. You should consider the additional costs of heating, lighting, gas and all other necessities for your workplace.
Related: 3 Strategies To Protect Your Business From Inflation
2. Labor costs
Higher inflation also affects wages. With the cost of living rising, workers are more likely to demand higher wages to compensate for inequality. If your company employs a team or outsources an aspect of your business, you need to look at your labor costs. If you can’t afford higher wages, you need to anticipate employee turnover or to stealas this study has found, which will impact your bottom line.
Another aspect of labor costs is the risk of a decline in worker productivity. If you’ve already negotiated rates for your team or freelancers, there’s a chance they’ll feel less motivated if you can’t raise their pay. This means that even if you keep your labor costs at the same level as your original business plan, you could run into efficiency issues and produce fewer products, decreasing your balance of income and expenses.
3. Currency fluctuations
Even if your business is not a major importer or exporter, it can still be affected by currency fluctuations. If you buy raw materials or goods abroad or let foreign freelancers pay in local currency, you will probably find that your dollars don’t stretch that far. Although you may have agreed a rate with a weaker currency, you will pay more. You should account for these increases in your business cost analysis.
Related: Inflation is another beast for entrepreneurs. Here’s how to protect yourself.
4. Loan Restrictions
Borrowing is also subject to the vagaries of inflation. Many lenders are aware of the increased risks within the market and will increase their rates. In addition, the Federal Reserve uses interest rates to curb rising inflation. The Fed typically raises the base rate to address higher inflation rates and bring them back to optimal levels. Unfortunately, this rate increase is passed on to private and business customers.
If you need to borrow money for your business, loans may be unaffordable. In addition, lenders may be hesitant to offer loans to new businesses, so you may struggle to qualify with a limited financial track record.
If you already have a business loan for your business and it is not a fixed-interest loan, you must factor the higher interest charges into your expenses. Floating rate loans are subject to rate changes, so it is likely that your lender will contact you to let you know what your new rate is and when it will apply. This makes it very difficult to budget for your typical monthly expenses as your loan repayments may be higher from month to month.
5. Tips to reduce the impact of inflation on your business
Fortunately, there are some things you can do to mitigate the impact of inflation on your new venture:
6. Reallocation of your working capital
While it is a good thing to have cash on hand to deal with any problems with your business, with high inflation rates it is not a good idea to have a lot of cash. The purchasing power of the dollar decreases when inflation is high. Let’s say last year you had $10,000 that allowed you to buy X amount of products. The following year, the same $10,000 would only cover the cost of fewer items.
This means that you need to think carefully about what you do with your business cash. If you don’t want to commit your money because you may need to access it, consider a high-yield savings account or short-term bond. While this may not be as inflation-proof as the stock market or real estate, you’re not sacrificing liquidity.
7. Negotiate the Dollar
If you outsource to freelancers or employees outside the US, be sure to negotiate dollar rates. Regardless of currency fluctuations, you still pay the same amount. This removes some of the uncertainty and allows you to budget your costs.
8. Evaluate Your Spending
Finally, evaluating your operating expenses is one of the most effective strategies for mitigating the impact of higher inflation. Take a serious look at all your expenses and operating expenses. There may be areas where you can save so that you can create a buffer to offset any increased costs.
It may be worth reassessing where and how you source raw materials. It may be able to find a better deal or set up a flat rate contract to protect itself from higher costs soon.
Related: 6 Ways To Protect Your Small Business From Inflationary Pressures
While higher inflation is discouraging, being prepared is the best defense against potentially rising costs. Taking a proactive approach can help you address the potential implications of higher inflation. This allows you to continue your business with minimal disruption and weather potential financial storms to help your operation succeed.