Rising Inflation and Its Impacts on Capital Budgeting

India’s Consumer Price Index ( CPI ) growth was measured at 5.0 % YoY in Jun 2018 which when compared to that of May was 4.9 %.

The CPI measures in qualitative terms the extent to which prices for certain items are increased which means that the consumer’s purchasing power will get impacted.

All such indicators conclude towards a rising inflation, a general increase in prices and a decrease in the purchasing value of money. The inflation rate in India reached up to 5 percent in June of 2018 from 4.87 percent in May, below market expectations of 5.3 percent. Still, it is the highest rate since January and marks the eighth straight month in which inflation is above the central bank medium-term target of 4 percent.

If we talk about small businesses, constantly rising inflation could have really dramatic effects. I am sure most of the entrepreneurs are aware that higher inflation can lead to higher prices, but let’s look into the impacts of that in detail.
Let’s see how inflation could potentially have an impact on your business and how you can prepare to mitigate any risks posed by this:

Direct/Indirect impact on goods, services, and equipment

The inflation rate is determined by the cost of common essential items and goods purchased by most households and the fluctuations in prices. The recent increase in inflation in India is due to rising prices of gasoline, health care services, apparel industries etc.

While your business might not require the same items that an average household purchase, a general increase in the inflation rate likely means that your start-up will eventually have to pay a higher cost to
produce the same goods or provide services.

According to economic forecasters, inflation will continue to increase steadily, one way out to tackle this issue for business owners could be a well -thought plan ahead for future prices. The safest and most recommended option is by building up a financial cushion by having business savings in place from time to time. That would help with any price fluctuations. You could also lock-in long-term contracts with vendors you deal with regularly so that you can depend on today’s prices for the duration of the contract.

Fewer Profits

More expenditure in form of equipment and supplies cost will arise due to inflation and that will impact your profit margin significantly. So, a resort to it could be to increase your selling prices to reach up to a
healthy profit margin.

If you believe you are required to raise your prices in order to stay profitable, you may indeed consider offering your loyal customers contracts with an economic price adjustment option. It is defined as a fixed- price contract with economic price adjustment provides for upward and downward revision of the
stated contract price upon the occurrence of specified contingencies. Using this technique, you can make adjustments based on criteria agreed upon in advance, such as your costs for labor or material or cost
indexes of labor or material and won’t suffer losses.

Higher Employee Attrition

As prices increase on end products, your employees may find it difficult to make ends meet with the current money they are getting and they may look for better opportunities outside to get a salary hike. Well, you also as an employer can offer them hikes, but it becomes challenging for you as well in an inflationary environment.

Instead, look for alternate options to increase employee retention by offering flexible scheduling, extra time off or complementary commute/food etc.

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