As a small business owner, you need to plan ahead and anticipate changes in the economy that could impact your business. Such as during times of high inflation. If you’re not prepared for this, it could seriously hurt your profits.
Luckily, there are steps you can take to help insulate your business from rising prices. In this article, we’ll outline some of them. So read on if you want to learn more!
Why Your Business Needs to Protect Against Inflation
Inflation is when prices for goods and services rise. It can be caused by a number of things, but usually, it’s due to an increase in the money supply. This can occur when a government prints too much money, for example. Here are five reasons you need to protect your business against inflation:
- Reduced profits. If prices rise but your revenue doesn’t, your profits will take a hit. This is because your costs will go up, but you’ll still be selling at the same price. So you’ll need to find ways to make more money or cut your costs.
- Difficult to get loans. Banks may be less likely to lend money during times of higher inflation. They’ll be worried about getting their money back if prices rise and people can’t afford to repay their loans. This could make it difficult for you to get the financing you need to grow your business.
- Higher interest rates. When inflation is high, rates of interest usually go up as well. Lenders will want to get a higher return on their investment to offset the risk of inflation.
- Difficult to budget. When there’s inflation, prices and your purchasing power are constantly changing. This makes it hard to predict how much you’ll need to spend on things and stick to a budget.
- Increased competition. Times of high inflation are often accompanied by economic recessions. This means that more businesses will be looking for ways to cut costs and stay afloat. You’ll need to be extra competitive to stay ahead.
How to Protect Against Inflation with Assets and Investment Strategies
You can protect yourself against the effects of inflation through proper investing in different asset classes. You can invest yourself or use discretionary investment management services from a professional money manager. Just remember that investing involves risk, so don’t put all your eggs in one basket. Let’s take a look at seven asset classes you can add to your investment portfolio to protect your business from inflation:
Treasury Inflation-Protected Securities
Treasury inflation-protected securities (TIPS) are a type of government bond that offers inflation protection. TIPS bonds pay interest based on the Consumer Price Index (CPI) twice a year which is applied to the adjusted principal. So, if prices rise, the interest payments on your bonds will go up too. They’re a great inflation hedge and a way to ensure that your income keeps up with higher prices.
Investing in Stocks
Another way to hedge against inflation is to invest in the stock market. While stock prices can be volatile, over the long run, they tend to go up with inflation. This is because companies are able to pass on higher costs to consumers through price increases. If you’re looking for a more aggressive way to protect your business, investing in the stock markets may be the way to go.
Real estate is a great hedge against inflation because, as prices rise, the value of your property will go up as well. This can provide you with a nice nest egg to help offset the effects of an inflationary environment.
A commodity ETF is an exchange-traded fund that tracks a basket of commodities. This is a convenient way to invest in commodities such as gold, oil, and agriculture without having to purchase each one individually. These commodities have a history of outperforming inflation.
Fixed Income Investments
Investing in the bond market and annuities is a good way to protect your business against inflation. They offer a fixed return, regardless of what happens to prices. If you’re looking for a more conservative way to protect your business, this may be the way to go.
Precious metals, such as gold and silver, are also a good way to protect your business against inflation. This is because they tend to hold their value when prices are rising. They can also be used as a hedge against other investments, such as stocks and commodities.
Collateralized Loan Obligations
Collateralized loan obligations (CLOs) are a type of investment made up of a pool of loans that are backed by collateral. This collateral consists of things like real estate and other assets. If inflation increases, the value of the collateral will go up, providing a buffer against the effects of inflation.
How to Protect From Inflation: 5 Top Tips
Small businesses should be vigilant about protecting themselves against inflation. Here are five top tips:
1. Interest Rates Rise
As inflation rises, so do interest rates. This makes it more expensive to borrow money and can impact your bottom line. Make sure you have a plan in place to deal with higher interest rates.
2. Real Estate Investments
Real estate investment trusts (REITs) offer many of the same benefits as investing in real estate, without the hassle of being a landlord. This can be a great way to protect your business from inflation.
3. Rising Inflation
As inflation rises, businesses will pass on the higher costs to consumers through price increases. This can eat into your profits because customers may start buying less. Be sure to have a solid plan in place to deal with higher prices.
4. Diversify your assets
Don’t put all of your eggs in one basket. Diversifying your assets and investments protects you against the effects of inflation. And if one investment goes south, you’ll still have others to fall back on.
5. Review Your Prices Regularly
Make sure you review your consumer prices regularly to ensure they’re still in line with the market. If they’re not, you may lose customers to competitors who are selling at a lower price.
Can you protect money from inflation?
There are a few things you can do to protect your money from inflation such as investing in assets that tend to go up in value when inflation is high. These include real estate, commodities, stocks, gold, and oil. Another option is to hold cash in a foreign currency that isn’t affected by inflation in your home country.
What is the best investment in inflation?
The best investment depends on the level of inflation and your goals. If inflation is low, you may want to focus on growth investments such as stocks. If inflation is high, you may want to focus on preserving your purchasing power by investing in assets such as commodities or gold.
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This article, “How to Protect Against Inflation in 2022” was first published on Small Business Trends