India has been witnessing a sharp rise in the inflation rate since September last year due to a spike in crude oil prices, as well as disruptions in the supply chain due to geo-political reasons. Inflation refers to the rise in the prices of goods and services, and conversely the diminishing of the strength of currency as buying power declines. While inflation impacts consumers and suppliers alike and takes a toll on businesses across the board, small businesses are disproportionately impacted. This is because small businesses have limited liquidity and resources, and a sudden spike in costs, concurrent with a possible fall in demand, can spell disaster for them. Let’s explore if small businesses in India are ready to tackle inflation.
Inflation is typically measured by taking stock of the cost of goods of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Inflation is gauged by studying the average percentage of price change of a basket of commodities and services over a certain period of time. In India, the Ministry of Statistics and Programme Implementation measures inflation. Inflation is primarily measured by two main indices in India, the first of which is the Wholesale Price Index (WPI), which takes wholesale level price changes into account, which impact businesses; and the Consumer Price Index (CPI) which measures retail-level price changes affecting consumers.
CPI numbers witnessed a sharp increase in April at 7.79%, followed by a dip to 7.04% in May this year. However, in a reassuring trend, the June inflation numbers saw a downward movement due to a cut in excise duty on petrol and diesel, as well as restrictions on the export of food to check shortages and price hikes. According to data from the Ministry of Commerce & Industry, the WPI had also spiked to 15.88% in May this year, and hovered around 15.38% in April, but dipped to 15.18% in June. But if global trends are anything to go by, the worst is far from over. It is important to keep an eye on both domestic and international phenomena that might cause economic changes, in order to anticipate a spike in inflation rates.
Various macro factors can influence the economy and drive up inflation. Geopolitical tensions and Black Swan events like the COVID-19 pandemic are examples of circumstances that set off a chain reaction, leading to supply chain disruptions and rising costs of raw materials. This, in turn, drives up the cost of consumer goods and results in a widespread increase in inflation numbers. The rate of increase is usually represented as the increase in the average price level of a basket of goods or services, such as food or fuel.
After the COVID-19 pandemic ravaged the global economy, many supply chains that supported production engines across the world remained broken. As a result of this, there has been a steep increase in the cost of raw materials across the board, which in turn pushed up the cost of production. As demand for consumer goods and other materials spiked across the globe with economies bouncing back from the setback they suffered, fuel costs and freight bills also increased, causing further difficulties for smaller businesses. As the cost of living has skyrocketed, business owners have also had to step up wages to help their employees keep up with the bills, causing a further squeeze on their finances.
While macro factors do influence inflation in the short term, MSMEs in India have been contending with the constantly increasing prices of goods and raw materials over the past several years, as there were several instances of shortages. The COVID-19 pandemic has added to the woes of the sector, as some industries and businesses were severely impacted by their over-dependence on imported materials.
Inflation and its consequences can impact the operations of a small business in various ways. The most significant of these is an increase in business expenses. As the prices of raw materials and other overhead expenses increase, so does the cost of production and operation. This results in business expenses going up, as wages, rent, transport, electricity, and fuel become more expensive.
Another major issue small businesses have to deal with in an environment of increased inflation is a fall in demand and sales. Inflation impacts industries and individuals alike and as the spending power of consumers falls, so does the demand for non-essential goods and services, impacting their sales. This, in turn, results in cash flow issues, which may even result in small businesses struggling to keep operating. Lower profit margins negatively impact the financial health of businesses, and this is especially true for small businesses in India, which might even have to face business closure if a spike in inflation takes a major toll on their turnover.
When the cash crunch caused by increasing inflation starts taking a toll on business operations, business owners, especially those with small businesses, need a contingency plan to stay afloat. The first order of business is to have an emergency fund ready. This fund should be able to cover bills and expenses, as well as EMI payments and other liabilities incurred by the business for a period of at least 6 months. In the event of a cash crunch, the entrepreneur can dip into this resource to keep their business running smoothly. However, this is much easier said than done, especially for small businesses in India, which have limited resources and often lack adequate profitability to be able to put away capital in an emergency fund.
There is also a need to be prepared for adverse financial circumstances that might arise out of inflation from a business standpoint. One way to do this is to buy up inventory ahead of time. Inflation sets off widespread shortages of raw materials and products, so in order to have a secure inventory to fall back on during scarcities, entrepreneurs must invest in stocking up in advance.
Another crucial factor is expanding the customer base in order to balance out the decline in demand. A larger base ensures that even reduced demand does not bring business to a complete halt. This can be accomplished through consistent investment in outreach and establishing relationships with customers. Expanding the product portfolio or opening up at a new location can also be extremely helpful. Investing in tech solutions is another aspect worth exploring, as it allows for the streamlining of operation, reduced overhead costs, and improves the customer experience. For instance, creating an online presence can make it easier for new customers to find a small business.
All the preparatory measures required for a small business in India to effectively tackle inflation require a substantial amount of investment. Given that these businesses often operate on a limited amount of cash flow and resources, they are very likely to lack the liquidity necessary to fund these solutions. A business loan from a non-banking financial company (NBFC) can not only help small businesses in India fund operations during a financial crunch, but also take initiatives to be prepared ahead of time.
NBFC business loans are designed to be disbursed quickly in order to cover the operational expenses of a company. While these loans can also help fund long-term investments and business expansion, in the short term, such a loan can be very useful in covering the working capital requirements of a company. Small business entrepreneurs can use these loans to cover employee salaries, rent, utilities, etc., in order to ensure that their operations continue to run smoothly. Any unexpected expenses can also be covered with the help of an NBFC business loan. Most banks and NBFCs offer business loans, and some like Kinara Capital even provide collateral-free loans with an extremely quick turnaround time. Kinara disburses loans in as little as 24 hours, which can be very useful if you need capital on short notice.
While the impact of rising inflation can be tackled with the help of a business loan, the best way to weather such events is to plan ahead. You can use a Kinara business loan to invest in a number of business solutions like tech and portfolio expansion to grow and improve your operations well before inflation spikes. This way your company can continue to function with minimal setbacks, no matter what the circumstances.
Small businesses in India operate on limited capital and resources and are not particularly well-equipped to tackle inflation. The impact of a sudden spike in costs while demand dips, can result in very difficult circumstances for small businesses if they are not prepared, and can even lead to business closure. Business loans can be a great way to make up for financial shortfalls by covering any sudden rise in expenses triggered by inflation. Collateral-free business loans from Kinara Capital can ensure that small businesses continue to operate smoothly during a period of increased inflation, since they are easy to apply for, disbursed within 24 hours, and flexible enough to be utilized for a range of purposes.