You could be forgiven for thinking that rising prices and increased overheads are entirely bad news for UK businesses. But, there are a number of hidden benefits of inflation for businesses that mean that rising prices needn’t signal complete doom and gloom.
It’s true that the benefits of low and stable inflation are initially a little unclear for many businesses. And it's a topic that elicits concerns among individuals and businesses alike. Rising prices, diminishing purchasing power, and economic instability are the downsides of inflationary periods.
However, it's important to recognise that not all of the consequences of inflation are negative. In fact, there are some surprising benefits that UK companies can reap during times of inflation.
In this blog, we'll explore the unexpected advantages for some businesses and shed some light on how companies are leveraging inflation for their own benefit.
Nailing a business pricing model is challenging for any business. Increasing unit prices can be really difficult when there is little or no upward inflationary pressures. It’s difficult for customers to appreciate why prices need to rise — whether due to increased manufacturing costs, updated margins, and more — and gaining acceptance can be really difficult.
However, when inflation is the main topic on the news and strikes and industrial action lead to high visibility of upwards pressures, customers are more accepting and open-minded.
What industry benefits from inflation?
Technically, any industry can benefit when it comes to pricing as people understand that everything costs more and expect you to put your prices up.
If you have been facing challenging, squeezed margins for any number of reasons over the last few years, then now could be the time to try and improve your profitability.
Increasing profits naturally increases revenue but does it always increase profits? And are companies taking advantage of inflation in a positive way?
During inflationary periods, prices tend to rise across the board, including the products and services offered by businesses.
This means that companies can generate higher sales figures as customers adjust to the new price levels but at the same time, their input costs also increase meaning that profitability can often remain static.
That being said, businesses with the ability to control their costs effectively can maintain their profit margins, and it’s not unheard of to find companies profiting from inflation.
Inflation can also serve as a hidden ally for UK companies burdened with debts because as the general price level rises, the value of money decreases over time.
Imagine a business that borrows £100,000, interest only over five years. With an inflation rate of 5%, this would mean that the real value of the loan repayable at the end of the term would be around £77k. At 10% inflation, it would be a real value of less than £60k.
Consequently, the real burden of debt decreases as inflation increases.
For companies that have borrowed money at fixed interest rates, inflation erodes the value of the debt, effectively making it easier to repay in the future. This can alleviate financial strain and provide opportunities for businesses to invest in growth initiatives.
Inflation often leads to an increase in the value of tangible and financial assets. Companies that own property, equipment, or other assets can benefit from the rising prices associated with inflation.
The appreciation in asset values can bolster a company's balance sheet, enhancing its net worth and providing greater collateral for securing loans or attracting investors.
A good example of companies taking advantage of inflation would be a business that buys a lot of stock at the start of the year and sees prices rise in the subsequent months. At the end of the year, without doing anything, the value of the stock increased markedly.
This increase in asset values can have a positive impact on a company's overall financial position but of course, this assumes that the business has the ready capital to hold a large inventory.
Inflation typically puts pressure on wages as employees demand higher salaries to cope with the rising cost of living.
While this can be challenging for businesses, we do see companies increasing wages due to inflation in the short term, and it also presents an opportunity for companies to align salaries with market conditions.
Adjusting wages in response to inflation can improve employee satisfaction, boost morale, and enhance productivity. It can also help attract and retain top talent, leading to long-term benefits for the company.
Wage rises can also be linked to increasing efficiency and output. A rise which may seem generous during times of low inflation is of lesser value during inflationary times but still carries with it the expectation of a quid pro quo.
Inflationary periods can create a sense of urgency and drive for businesses to innovate and invest in their operations.
The need to maintain competitiveness and mitigate the impact of rising costs can push companies to explore new technologies, streamline processes, and develop innovative products or services.
Take Payhawk for example. When businesses find their cash flow squeezed and set out to be more explicitly cost-conscious, they often start with expense management. Our corporate cards with built-in controls enable businesses to empower employees to spend efficiently for work, avoid lengthy reimbursements, integrate with expense management software, and gain real-time visibility over expenditures, all while retaining complete spend control.
Smart investments in technology can result in long-term efficiency gains, improved customer satisfaction, and enhanced market positioning, ultimately benefiting the company's bottom line.
So, are there any benefits of inflation?
It’s easy to think that there’s nothing to do when inflation increases, and UK businesses may feel a little helpless at the moment.
But whilst inflation can bring about economic challenges and uncertainties, it's important to recognise the potential advantages that can arise for companies.
By embracing the opportunities that inflation presents, businesses can increase revenue, manage debts more effectively, see asset appreciation, adjust wages to market conditions, and stimulate investment and innovation.
History shows that companies that understand and adapt to the changing economic landscape can thrive even in the face of inflation, turning it into a catalyst for growth and success.
From wages and product pricing to subscriptions and travel expenses, your business must have a firm grip on exactly what it’s spending to ensure that it can weather and even leverage the impact of inflation and other economic conditions.
When it comes to spend management and getting full visibility over day-to-day business spend on expenses like business travel and software subscriptions, technology is your best friend. Smart spend management solutions including credit cards, in-built controls, and expense management lets you control you spend and get the full oversight you need to make impactful, strategic decisions.
Want to make sure that your business has the full picture when it comes to managing spend? Book a demo today.
Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.