What is inflation? The Bank of England uses the term to describe price increases over time, and the ‘rate of inflation’ is how quickly this goes up.
On 3 February 2022, the rate was 5.5%, against a target of 2%! The Office for National Statistics checks the prices of a range of goods and services, incorporating over 700 items ranging from groceries to petrol, cars and holidays. The Consumer Price Index measures the average change in prices of all the items, and comparing the difference with last year’s average prices provides the rate of inflation.
Rates of inflation fluctuate up and down, but for the majority of the last 20 years it has increased by about 2%.
Just for fun, I found out in the year I was born goods costing £10 would now cost £364.61 (I’ll leave you to work out how long ago that was!).
Whilst these statistics give an overall average rate, individuals and businesses will have their own rate of inflation based on their circumstances, and it might be difficult to gauge. For example: if the business has a high reliance on power or experiences significant wage bill rises (as recently seen in the transport sector), their inflation rate will be considerably higher.
A healthy economy needs a low and stable rate of inflation and The Bank of England have a set of tools to use to try and achieve this. The main way is by setting interest rates, with a higher rate aiming to encourage saving and discourage spending. In turn, less spending should make prices rise more slowly (and vice versa).
Here are some ideas to mitigate the effects of inflation on your business:
- Using a range of scenarios, use budgets and cash projections to predict and plan for the effects of inflation.
- Keep track of your profit margins and the selling price of your products or services. The recent wave of failed power supply companies illustrates the importance of this point: constrained by what they could charge their customers, costs rose above the selling price, forcing them out of business.
- Thoroughly review expenses (don’t be tempted just to add a few pounds to last year’s spend) by researching suppliers of comparable materials, identifying essential and non-essential spend, reviewing working practices (hybrid working could be an option) and removing any unnecessary processes.
- Investigate the effects of raising your prices, which is a balancing act; increases in profitability must be weighed up against the potential loss of customers.
- Look at what your competitors are doing.
- Inflation can create opportunities to seek out and recruit new customers, but make sure they’ll be good for business.
- Are you able to stock up on your supplies? Assuming you have funding and storage available, this may be a good strategy in the short/medium term to avoid price rises.
- Look at improving productivity (perhaps through automation of processes), the more efficiently you work the better your profit.
The key to coping with inflation is to examine your business thoroughly and create a personalised, flexible plan. Don’t muddle through and hope it will all be alright on the night!
If you have any queries, you can contact me on 01473 833411 or [email protected].
Peter is the Guild’s accountant.
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