Inflation: Effect of Inflation on Small Businesses

In today’s Founder’s Thought, we will explore ideas discussed in the previous two Founder’s Thoughts, titled “Inflation: Effect of Inflation on Interest Rates” and “Inflation: Effect of Inflation on Poverty”. To be more specific, we will explore how the effects of rising interests and decreasing purchasing power can affect the financial condition of small businesses and affect their decision-making

Rising Costs

By definition, inflation brings a rise in costs to a small business. However, unlike mega corporations, small businesses do not have the leverage or the resources to fight these rising costs or find a sustainable, alternative producer with the same quality as their original. Thus, small businesses experience thinning profit margins along with a hostile competitive environment as their large competitors have an advantage and their smaller competitors are just as desperate as they are for some financial breathing room.

Pricing Adjustments

Like any good business does, most small businesses adapt to external factors. Here, small businesses are forced to make pricing adjustments and decide whether they want to charge higher prices and maintain their margins while possibly shooing off customers or tanking the lower margins to maintain their customer base. Yet, both options are compromised positions. The only difference is that charging higher prices leads to a positive feedback loop that exaggerates inflation.

Effect On Community

As mentioned earlier, both options to adapt to the rising costs are compromised, especially when analyzing their effect on the community. For example, if a corner store were to increase its prices, it would be difficult for the supporting population to match these price increases to keep the business afloat. Regardless, this creates a gash in the pockets of the community. On the other side, if the corner store were to keep its prices the same, the rising raw material cost would force the corner store to streamline its resources, namely employment, resulting in the loss of jobs that belong to the community.

Conclusion

Overall, inflation leads to difficult decisions for small business owners, both of which are destined to result in some sort of financial loss for the business and the community. Small business owners also experience greater difficulty in terms of access to capital as the rising interest rates make it difficult for them to borrow sustainably.