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How to Navigate Inflation as a Business Owner

Inflation is a general increase in prices and a common measure of inflation is the Consumer Price Index (CPI). According to The Bahamas Department of Statistics, as of December 2021, CPI is 113.24 with a 4.1% annual percentage change. Inflation usually influences the entire supply chain which may impact a business’ profitability. Some risks, such as inflation, business owners cannot eliminate. Despite this reality, it is possible to navigate an inflationary environment.

Financial Analyses

Cost-benefit Analysis

Changes in the economy should encourage business owners to take a deeper look into their business performance. If your business offers multiple products and services, it is essential to do a cost-benefit analysis and make wise business decisions. A cost-benefit analysis will assist with adjusting output or eliminating low-profit generating products and services.

  1. Itemize low-profit goods and services.
  2. Determine the direct and indirect costs associated with those goods and services. Compare the cost results to the benefits. Examples of benefits are revenue earned and costs saved by offering those goods and services to the market.

Ratio Analysis

  1. The current ratio is used to understand the liquidity of a company. The calculation is current assets divided by current liabilities. A good current ratio is between 1.2 to 2.

  2. To measure a company’s long-term solvency debt ratio can be calculated. The calculation is expressed as a percentage. It is determined by dividing long-term debt by the company’s net worth.

Net worth is a company’s assets minus liabilities.

Variance Analysis

After a company’s budget has been set, it is important to compare the budgeted amounts to the company’s actual performance. A variance analysis assists with highlighting financial changes in the business.

Market Analyses

Customer Feedback

Economic changes such as inflation may impact demand and supply in the market. It is key to consider the various segments of a business’ consumer base. Customer feedback can be obtained via surveys presented in-store, through email, or through telephone conversations. Surveys will allow business owners to understand the consumers’ sentiments, favourable price ranges, and effectiveness of advertising.

Market Research 

There are important non-financial factors for companies to consider in an inflationary environment. Market research may present data to assist business owners with strategizing on how to maintain customer loyalty, brand equity, and pricing power.

Marketing Campaigns

Customer feedback and market research are essential factors to use while developing marketing campaigns. Based on the results of the aforementioned, campaigns can be implemented to navigate during an inflationary environment.

Maintaining a profitable business during economic inflation presents its challenges. However, financial and market analyses along with other business factors can aid in business success during various economic cycles.