Inflation's Impact on Your Business: What to Do About It
February 1, 2011
Inflation for all of 2010 was only 1.5%, but it ran at a 3% rate for the second half of the year. If, as some observers suggest, inflation is again an issue, what can you do about it?
Impact on your business
Inflation is a measure of the rise in the cost of goods and services. Certainly, this has been felt most acutely of late at the pump when filling up a car or truck. But it is also reflected in rising commodity costs; the costs of lumber, copper, and other building materials are on the rise.
Inflation means it costs you more to do business. You pay more for the items you need to buy, from paper for your copy machine, to the costs of transportation.
Inflation also means that the cost of borrowing money will likely continue to rise, as it has been doing for the past several months.
What to do
Inflation can be a serious problem for some businesses. Many cannot absorb price increases and surcharges, at least not without taking some action.
Purchasing. Expect to pay more for the items you need to buy. To minimize the impact of price increases, shop wisely and cut planned purchases where possible. For example, reduce consumption (e.g., drive less to save at the pump) and postpone purchases unless absolutely necessary at this time.
Borrowing. If you have outstanding fixed rate loans, inflation means that you are paying off the loan with inflated dollars. However, if you need to borrow money now, or have outstanding adjustable-rate loans outstanding, inflation means borrowing will cost you more.
Where possible, retain earnings for future use in your business so that you don't need to borrow when inflation is high. For most businesses, there is no limit on how much you can retain. However, C corporations have a limit, but they can avoid the accumulated earnings tax by specifying the reasons for accumulation (e.g., planning an expansion project).
Adjusting prices. As prices rise for the goods and services you have to buy, you'll need to adjust your own prices accordingly. Make sure you do it right. Find some helpful tips here.