How to protect your SME from inflation

Prices of goods and services have risen across the nation, and this is the same around the globe. Small and medium-scale business owners are feeling much of the scourge, and Many have been forced to downsize or go down the drain.

This year most especially, has become a tough one for Nigerian, and other African countries. The inflation rate is at its highest peak and there’s no sign of it abating soon.

Businesses are on the verge of collapse, while business owners are racing again time to stay afloat.

It’s a tough reality for many because the signs are everywhere.

But the truth is that inflation is common to all businesses. Be it a small and medium scale business or a large corporation. In reality, everyone grapples with it.

The presence of inflation has influenced the operation, planning, and pricing of organizations for decades and in recent times.

And so, while the high and inflated cost of things has spelt doom for many, especially those SMEs, there is a way to protect yourself and your business from its scourging effect.

The good news is that with the right approach, methods, and decisions, inflation can be managed and even mastered, and this is what this article promises.

This article gives true and time-tested ways businesses can manage and master inflation, and have an undue advantage over other businesses.

What is inflation?

Inflation generally refers to the rate at which the prices of goods and services rise due to bad economic factors and governmental policies.

The rise of goods or services in a sector of an economy can cause a ripple effect on the other sectors, and when this happens, it’s said that inflation has set it.

In Nigeria, two main factors that have caused so much inflation within a short time are the fall of the Naira against the dollar. Also, the removal of fuel subsidies from fuel consumption.

These two factors cause a ripple effect on everything ranging from basic commodities to the cost of goods and services.

And by the basic law of economics, inflation will always affect the chains of production, laying off of workers, and downsizing the organization. On the consumer side, it led to low demand for goods and services, especially luxury goods. 

This means sales will be less and the profit will be reduced, while the running cost for organizations increases.

This of course has spelt doom for several, especially the SMEs.

Let’s take a good look at what constitutes small and medium-scale enterprises.

Is your business a small and medium-scale enterprise?

Small and medium-scale enterprises make up the majority of businesses around the globe. They are independent organizations or firms with less than 50 employees.

However, the maximum number of ranges for SMEs differs around the world. For example, the UK defined small and medium-scale enterprises as those with 500 employees or less.

In Nigeria, the Small and Medium Industries Enterprises Investment Scheme (SMIEIS) defines small and medium-scale enterprises as any firm or orga

with a maximum asset of two hundred million naira, excluding land and working capital, with at least 10 or more than three hundred staff.

Now you have a grasp of what an SME is all about.

How does inflation affect SMEs?

With rising inflation, every element that constitutes your small and medium-scale enterprise becomes affected. Businesses begin to feel the effects of the procurement of raw materials, the cost of lighting, and so on.

Again, because we live in a world that has to do with the survival of the fittest, incorporating these high costs in your business, seeking to maintain quality and deciding to increase the cost of goods or services becomes very challenging.

Inflation affects every facet of the business. employees may look for their so-called secured Jobs during inflation, while others may demand an increase in wages and salaries. 

Causes of inflation 

Inflation is an effect of a cause. The cause of inflation ranges from several economic factors, and political factors and also can be caused by war, drought, and other natural consequences.

For example in Nigeria, the cause of inflation is the depreciation of the Naira. Since Nigeria is an import-dependent nation, it relies so much on the dollar. This has led to an increase in the dollar, ultimately causing increases in goods and services.

Another pivotal cause is the removal of fuel subsidies. And since the price of petrol has a direct effect on the cost of goods and services, the high became one of the major causes of inflation in Nigeria.

The ongoing war in Ukraine has also caused the price of wheat to increase. This has a direct effect on the cost of bread and pastries.

4 ways to protect your business from inflation 

1. Reduce any fixed costs that are not indispensable to business

Inflation is a good opportunity to reevaluate running costs and reduce any costs of running the business that is not critical.

Determine whether your subscription, consumables, and other less critical operations are necessary.

This is very important. Having taken the inventory, you may find a huge chunk of cash that can be saved from this evaluation.

While this is important, it is not advisable to downsize the business workforce. These people are the much-needed capital that is needed in getting you to overcome inflation. Don’t do this, unless it’s extremely critical and unavoidable

2. Diversify your supply chain

As inflation ranges, businesses must become prudent in diversifying their supply chain. By this, we mean that businesses should seek different and multiple channels to get their raw materials. Inflation may cause shortages of these materials, as some vendors may be forced to close up. However, having multiple channels will help you to absorb any effect of such eventuality.

Also, having multiple channels of supply will increase your bargaining power, as you will have more leverage to make bargains that are beneficial to the business. Also, this means that there will be no time for the business to experience a shortage of these materials

3. Optimize the whole business operations

During inflation, the first capital you must seek to optimize is the staff. Redirect their role, split the group if necessary, remove any bureaucracy within the leadership and let things run as swiftly and fast as they could. 

You must seek to manage the people so that their input produces more than usual. 

Cut any time spent on frivolities, and seek new ways and technologies to speed up processes.  Cut any non-essential trips and retreats, AMD lets the whole team work and strategies more to beat the recession

4. Make the price adjustment

Inflation comes with rising costs of businesses and supply. And one of the effects on your business must be the increase in the price of your goods and services. However, you must be prudent in this regard. It’s noteworthy to state that during inflation, consumers are shocked, they spend less and often seek alternatives.

To beat the businesses, you must increase your prices as slowly as possible, while you do everything to still retain your customers

Conclusion

Managing inflation is critical to business survival. During inflation, you must move quickly to allow for the necessary changes that must be made in the interest of the business. 

Organizational agility is very important in this regard. As stated earlier, downsizing the workforce may not be in the interest of the business in the long run. It must be done only as the last resort.

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Paul Umukoro

Paul Umukoro

Paul Umukoro is an astute content writer with makemoney.ng. He writes mostly on hot, contested, and valuable topics in business, finance, and technology. He majored in computer science.

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