What New Entrepreneurs Should Know Amid Rising Inflation

What New Entrepreneurs Should Know Amid Rising Inflation

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Setting up a new enterprise can be both exciting and daunting. There are many things to consider, but you may not have considered the impact of inflation on your business. Open any newspaper or read any news report. Higher inflation rates will be a topic of conversation.

How can new entrepreneurs navigate their new businesses amid rising interest rates ?? Here are eight things you need to know:

1. Increased Prices

The first way inflation can impact new entrepreneurs is the increased prices in the marketplace. Producers may need to budget for higher raw material costs. Consider what raw materials you will need to make your products and the cost of each component. With higher inflation rates, you could be paying 5% to 8% more for your raw materials, which you will need to factor into your pricing and business plan.

Even if you are not producing a physical product and instead offer services, your enterprise is not immune to the increased prices. You should also consider the extra cost of heating, lighting and gas for your workplace.

Related: 3 Strategies To Protect Your Business From Inflation

2. Labor costs

Higher inflation will also impact wages. With the cost of living increasing, workers are more likely to demand higher wages to compensate for the disparity. You will need to consider your labor costs if your enterprise has a team or outsources any aspect of your business. If you cannot pay higher wages, you will need to anticipate staff attrition or pilfering, as found this study, which will impact your bottom line.

Another aspect of labor costs is the risk of a drop in employee productivity. You can make your freelancers or team members feel less motivated if they are not paid the agreed rates. This means that even if you keep your labor costs to the same level as your original business plan, you could suffer efficiency issues and produce fewer products, reducing your income/expenditure balance.

3. Currency fluctuations

Even if your enterprise is not a massive importer or exporter, it could still be hit by currency fluctuations. You will find that your dollars won’t go as far if you buy raw materials or goods from overseas. You will pay more even though you agreed to a lower rate. These increases will need to be accounted for in your enterprise cost analysis.

Related: Inflation Is a Different Beast for Entrepreneurs. Here’s How to Protect Yourself.

4. Borrowing limitations

Borrowing is also subject to the whims of inflation. Many lenders are aware that there are increased risks in the market and will raise their rates. Additionally, the Federal Reserve uses interest rates to curb rising inflation. To address rising inflation rates, the Fed increases the base rate to bring them back to their optimal levels. Unfortunately, the rate rise is passed on to business and personal customers.

If you need to borrow funds to fund your business, loans may prove prohibitive. Lenders may be less likely to lend to new businesses than to existing ones, so it is possible to struggle to qualify if you have a poor financial record.

If you have an existing business loan for your company and it is not on fixed-rate, you will need factor in the higher interest costs. Variable rate loans can be subject to rate changes. Your lender will likely contact you to inform you of the new rate and when it will start. This makes it very difficult to budget for your typical monthly expenses as your loan repayments could be higher from one month to the next.

5. Tips to lessen the impact of inflation on your enterprise

Fortunately, there are some things that you can do to lessen the impact of inflation on your new enterprise:

6. Reallocate your business capital

While having cash on hand is a good thing to address any issues that arise with your enterprise, when inflation rates are high, having lots of cash sitting around is not a good idea. The buying power of the dollar is reduced when inflation is high. Let’s say you had $10,000 last year that could buy X number of products. The following year, the same $10,000 would only cover the cost of fewer items. This means that you will need to be careful about how to manage your cash. You don’t need to tie up your money, but you might still need to access them. A high-yield savings account, or a short-term bond, may be a better option. While this may not be as inflation-proof as the stock market or real estate, you won’t sacrifice liquidity.

7. Negotiate in the dollar

If you are outsourcing to freelancers or workers outside of the U.S., make sure that you negotiate rates in the dollar. You will still pay the same amount, regardless of currency fluctuations. This will eliminate some of the uncertainty, and it will allow you to budget for your costs.

8. Evaluate your expenses

Finally, evaluating your enterprise expenses is one of the most effective strategies to lessen the impact of higher inflation. Have a serious look at all your costs and operating expenses. You may find areas where you can save money. This will allow you to create a buffer that can be used to offset any higher costs.

It may be worth looking at where and how you source your raw materials. You may be able find a better deal, or to set up a fixed-rate agreement to protect your business from rising costs.

Related: 6 Ways to Protect Your Small Business From Inflation Pressure

While higher inflation is daunting, being prepared is the best possible defense against the potential rising costs. You can take a proactive approach to address the potential consequences of higher inflation. This will allow your business to continue without interruption and allow you the financial stability to make it through any financial storms.

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