Navigating Inflation

Inflation represents one of the key economic factors that significantly impacts the operations of small and medium-sized companies. As a process of general price increases for goods and services in the economy, inflation reduces the purchasing power of money, directly affecting operating costs, profitability, and even the business models of these companies. During times of accelerating inflation, small and medium-sized companies (SMEs) face a range of challenges that can seriously threaten their stability and survival in the market. In these situations, only a few companies have the right response to emerge unscathed from the "crisis" known as inflation.

One of the first consequences of inflation is the increase in input costs, which mainly includes raw materials, energy, and labor. As the prices of materials and energy rise, small and medium-sized companies often lack the capacity to absorb these costs without raising the prices of their products or services. However, increasing prices can lead to a loss of competitive advantage, especially if consumers are price-sensitive and switch to cheaper alternatives or ultimately delay purchases until a more favorable period for them as buyers. This puts SMEs in a dilemma: how to maintain profitability without losing clients? Or rather, is it possible to survive with reduced profitability? In my opinion, a company can survive with lower profitability, but if it fails to find a solution to its newly emerging problems, it may face the possibility of not surviving at all.

Furthermore, inflation can lead to increased labor costs, from wages and transportation expenses to additional costs imposed by the labor market, as employees expect compensation for the rising cost of living. For example, in the IT industry, employee perks such as entertainment centers and special culinary treats are common, but this shows that costs are endless, almost always tending towards infinity—of course, the question is whether we stick to the available budget for them. For small and medium-sized companies, which often operate with limited budgets, frequently dependent on additional borrowing, this can mean an additional burden. Wage increases may be necessary to retain qualified workers, but at the same time, they reduce margins and may lead to the need to reduce the number of employees or even restructure the company. These steps should not be considered negative, as no company is predestined only for success. Every company has its ups and downs, and all of this represents part of a company's life cycle. Just as it is difficult to steer in the right direction during times of growth, it is equally challenging to manage the survival process during downturns. I would call this part of the restructuring the survival process because that is precisely what it is. No company has a guaranteed existence; each decision can steer the company in one direction or another, and the outcome truly depends on whether the company's management, as well as the employees themselves, are aware of the moment the company is in. However, in some cases where the company is doing well but fails to monitor labor costs because while things are going well, we must think about potential future problems, this often comes at the expense of the workers.

Financing is another aspect of SME operations that inflation can negatively impact. During periods of high inflation, central banks typically raise interest rates to curb inflationary pressures. For small and medium-sized companies, which often rely on bank loans to finance operational costs or expansion, rising interest rates can mean more expensive borrowing. This adds further pressure on companies, especially those already with high levels of debt or operating in low-margin sectors. Even in these moments, companies sometimes fail to consider what is better for them—piling up short-term debts where only the interest is paid, leaving the principal for repayment in better times, or taking long-term loans that will further burden the company and its sales capacities, or a mix that needs to be well-crafted. However, this ultimately depends on the banks as well, but it is evident that sometimes the bank doesn't know what the companies need, and if you as a company don't know what you need, it can lead to disastrous consequences for both parties.

?Inflation can also destabilize the market and create uncertainty, making it difficult to plan and make business decisions. When prices are unstable, SMEs face the challenge of forecasting future costs and revenues, which can lead to poor investment decisions. In such circumstances, companies may postpone capital investments or new projects, which can impact their growth and competitiveness in the long run. Additionally, capital investments and investments can also help the company and the surrounding environment because investing in new facilities or machines is not directly related only to the company but also to the community as it initiates a broader concept of consumption. Capital investments and investments as a form of spending can have a dual impact on inflation. In the short term, investment growth can increase aggregate demand and lead to inflationary pressures, especially if the economy is already operating at full capacity. However, in the long term, capital investments can increase production capacities and productivity, which can help stabilize prices or even reduce inflationary pressures. The impact on inflation depends on the state of the economy and the monetary policy responses to changes in investment activity.

One of the less obvious but equally significant consequences of inflation is the reduction in the real value of receivables. In an inflationary environment, the money SMEs expect from their clients in the future becomes less valuable in real terms. This means that although the company nominally generates revenue, its real purchasing power and ability to cover costs decline. This can further complicate maintaining liquidity, especially in industries where longer payment terms are common. For example, if you have a payment term of 90 to 120 days and deliver goods at one price, but simultaneously the costs of all the aforementioned components have increased by 10 to 15%, your company faces a significant drop in margin, and if you operate on low margins, you may even enter a loss. Your new production cycle, or the company's work, is in trouble because you run out of operating funds if you are a company that meets its obligations on time. New moments arise where companies that have been successful for years and do not consider that something like restructuring can even happen to them. But if no action is taken in time, you face problems with banks, suppliers, and finally with workers, as it becomes very difficult later to choose who has priority in payment if decisions are not made in time.

In the fight against inflation, small and medium-sized companies can take several strategies. First, diversifying supply sources can help reduce the risk of sudden price increases for raw materials. This part may have less impact on certain commodities, but even a small saving can be significant when dealing with large quantities; it just requires finding a satisfactory negotiating option to achieve the goal. Second, flexibility in pricing and adjusting business models can help companies better respond to changes in demand. To do this, you must monitor the market and pay attention to how your sales are performing in the coming months. If you raise prices but your customers have not received raises in their companies, you may face reduced demand or even a complete halt in orders as customers switch to cheaper alternatives. It often simplifies things, and sales raise the question of whether profitability or turnover is more important. There is no clear answer in this case, as both can be detrimental to the company's business. Instead, it must be a combination of some joint activities that can guide the company through the "crisis" known as inflation.

Additionally, SMEs can attempt to improve efficiency by optimizing processes and reducing operational costs, which can help preserve margins. Unfortunately, companies often make mistakes in this third step and, without proper analysis and prepared plans, react impulsively, leading to cases where catastrophic decisions are made, typically linear cost optimization, without considering that this will all pass and that the recovery process needs to start at some point.

Inflation brings a series of challenges for small and medium-sized companies, but with careful planning and adaptability, companies can find ways to successfully navigate it. The key is balancing maintaining profitability and adjusting to a changing market environment while preserving liquidity and maintaining a competitive edge. When you look at it all, it’s not that difficult, is it?