Post date: 31-10-2022

In the last couple of years, inflation indicators in our country, as well as worldwide, have reached or even exceeded levels that developed economies had not encountered for decades. In particular, from the spring of 2022 onwards, double-digit inflation rates are being recorded in Greece, something that happens for the first time since the beginning of the 90s, in the wake of the collapse of the Eastern bloc.

• Initially, the COVID-19 pandemic shocked the global supply chain by shutting down many businesses, and also pushed many households into "forced" savings as lockdowns prevented them from spending as much money as they would usually do. Combined with the economic stimulus programs implemented by most governments during this period, it can be inferred that there was a big increase of the money available for circulation in the market.
• Subsequently, the international geopolitical crisis that erupted due to the conflict between Russia and Ukraine led to shortages of important raw materials such as natural gas, grain, fertilizer, and animal feed, naturally causing a chain reaction that affected the industries most dependent on these raw materials, which had to revise their product prices upwards to cover rising production costs.

In any case, predictions about the duration of this wave of inflation are highly cautious. At the time of writing, US and EU central banks have increased lending rates significantly in order to tame this phenomenon, accompanying their announcements with predictions of a multi-month recession.

Inflation and SMEs

There is a commonly held view according to which inflation does not affect businesses as much as it affects ordinary consumers, because businesses can adjust their prices at will, while consumers' income remains stable for long periods of time. However, businesses and consumers are intertwined parts of the same economy, and any change in the economic behavior of one inevitably affects the other. Focusing on small and medium enterprises, we can observe that inflation affects many parameters of their operation, like:

• the supply chain: every business depends on its suppliers, to a small or a large extent. In high inflation conditions, suppliers will be expected to adjust their prices upwards, and businesses will be required to manage the impact of this increase on their own profit margins.
• the pricing policy: if, during inflationary conditions, a business keeps the prices of its products or services intact, it essentially accepts an indirect slashing to its revenues, as money itself gradually loses its value. On the other hand, any price increase can have negative consequences in terms of the demand for the goods and services in question, as it affects their perceived value.
• the consumer behavior: consumers recognise that inflation is reducing their purchasing power, and thus their habits can change in response to this development. For example, some consumers reduce their overall consumption, or completely avoid "fancy" items.
• the borrowing costs: An increase in interest rates by central banks affects the cost of borrowing from any financial institution. For a business that has debt obligations, or is looking for financing for a large project, this can lead to unexpected additional costs.
• the job market: Prospective and existing employees perceive salary under a different light when they know that it will not offer the same purchasing power as it would in the past. Therefore, inflation can make it harder for a firm to recruit new employees, or even to retain existing ones.

Obviously, the timely treatment of the problems caused by this situation by each entrepreneur is imperative so that the normal course of his activities is not disrupted.

Managing inflation: pitfalls and opportunities

Knowledge should always precede action. The first step in dealing with the effects of inflation is to analyze the data of the organization and identify any points that could be most vulnerable to the new status quo. Some operational functions of a business that are considered to be more susceptible to this phenomenon have already been listed, but no two businesses are the same. Every source of information should be exploited, from sales and revenue/expenses data to any feedback the business receives from its customers. If inflation has already affected business operations, this will become evident through this information gathering process.

Once the potential "weak points" of the business have been identified, the decision-making stage should follow. Here the aim is to shield the business against any challenges brought by a potential long-term wave of inflation. Indicatively, some key actions that could contribute substantially to addressing the problems mentioned in the previous section are listed below:

• Pricing policy overhaul: The usual reaction of most businesses in times of high inflation, understandably so, is to raise prices on offered products. In fact, this situation even presents an opportunity for businesses that wanted to adjust their prices upwards anyway, since price increases seem to be more well-received by consumers when they are across the board. However, there are also cases where a price increase is not appropriate: when, for example, a psychological price ceiling for a large portion of consumers is about to be surpassed, or when the company cooperates on a long-term basis with customers that it does not want to displease. The entrepreneur can consider alternative methods of limiting the loss of profit due to inflation, such as reducing the quantity or quality offered at a fixed price, or choosing alternative raw materials that are more resistant to price increases. Of course, in any case, the necessary precautions should be taken so that the product does not lose its character and value, as these are perceived by consumers.
• Cost cuts: Extending the aforementioned proposition, the entrepreneur should examine all his suppliers, whether they are dealing with raw materials, energy, or third party services, and identify those that could possibly be replaced with more affordable ones at the given time.
• Renegotiation of obligation terms: After establishing the impact of rising interest rates on the company's contingent debt obligations, the entrepreneur should consider renegotiating the repayment terms to mitigate it. Also, in some cases where a supplier or financier offers the possibility of repayment in interest-free regular installments, this option should definitely be used, since in high inflation conditions it essentially constitutes a discount on the amount owed.
• Application for financing programs: Regardless of any concerns about a possible long-term recession, financing programs for businesses stemming from European or government funds continue to be great opportunities for any business that qualifies for them. Successfully claiming and utilizing the resources offered by such a program can completely banish the "shadows" cast by high inflation on a business. To implement such a funding request, or in fact most of the initiatives mentioned in this article, the entrepreneur can always work with a strategy consulting firm, leveraging their expertise in securing funding programs and transforming the overall organizational architecture of their clients.

A common denominator in all these initiatives is the long-term impact of each decision. In economic history it has been shown many times that every crisis is followed by a period of recovery. It is up to every entrepreneur to do what will set their business apart from the competition: to turn crisis into opportunity.

About the author: Nick Kanellis is a Market Development Consultant at Strategy Lens. He supports the process of launching new products and services, liaising with clients at every step from the initial design, up to market entry and promotion. You can reach out to Nick at nkanellis@strategylens.com or by phone at +30 2614 409 251.