How To Deal with Inflation: A Guide for Ecommerce Businesses

The rate of inflation in the United States has increased four-fold since the outbreak. The Consumer Price Index (CPI), as reported by the Bureau of Labor Statistics, grew by 8.5%. (data for March 2022). Everything is more expensive, from gas to electronics.

You’ll probably see your margins decrease as an e-commerce business. You might also want to modify your Payroll Requirements to keep up with inflation. Your staff might seek a paycheck stub maker raise, suppliers’ costs could go up, and shipping your goods will cost more.

With the resources at its disposal, the government has started the processes necessary to control inflation. It will take some time before things return to normal after the high inflation phase, however it won’t last forever. You will need to develop an approach to stop inflation in the interim.

Here are some strategies for dealing with inflation:

• Increase Your Prices

The quickest way to combat the impacts of inflation is to increase prices.

You can bargain with suppliers for a better price if you’re not comfortable upping the costs. Just keep in mind that suppliers typically won’t agree to a lower price because they, like you, need to maintain their margins.

Because price increases can reduce demand, most e-commerce entrepreneurs are at least somewhat hesitant to do so.

The fact that business owners frequently overestimate the sensitivity of customers to pricing adjustments is one of the main problems facing e-commerce businesses. However, quality is another thing that people pay attention to. If your product is high-quality, you generally won’t notice a major drop in demand.

The entire profitability and purchasing power of your business may be impacted if prices are not raised.

Let’s say your gross profit margin on a kilo of tea is $2 and the supplier increases the cost by $0.50. Your gross income would drop by $500 if you continue to sell at the same volume, let’s say 1,000 kilograms.

That’s not it, though. Inflation makes even $1,500 ($1.5 x 1,000 kg) of gross revenue less valuable.

For instance, you might have spent $1,500 on 550 gas gallons last year. You can now only get about 372 gallons of fuel for the same money due to a 48% price increase.

• Find Additional Suppliers

It’s not as simple as it may seem to switch vendors. You put a lot of effort into locating and cultivating a connection with your present suppliers. You will have to search for new suppliers, which means you must start over.

Finding new suppliers, however, would be useful given that analysts predict that inflation would take years to stabilize and that it will still have an influence even when it does. In an effort to boost gross margins, you shouldn’t source inferior goods. Maintain the present level of quality while searching for vendors ready to lower their prices and extend longer payment periods.

Keep in mind that there are other costs associated with purchasing things. Shipping costs are additional. Finding suppliers who are nearby can significantly reduce the cost of the goods.

• Good Cash Flow Management

A cash-strapped company is doomed to fail. Cash flow management is an essential component of your ecommerce business’s financial planning, especially in an inflationary environment.

Higher prices imply that you’ll need more money to pay suppliers for each order, but there’s more to think about. Ecommerce inflation affects more than just the price of your product. It will also have an impact on your utility bills, salary, and other operational and administrative costs.

You will require extra cash on hand if prices continue to rise. Then again, if you run out of money, you could have to stop running your company.

In order to combat inflation, there are numerous approaches to control cash flow:

• Strike a longer payment cycle deal

In order to have more cash on hand for longer, ask your suppliers for extended payment cycles.

• Good inventory management

Maintain a minimal inventory while maintaining a safety stock. In this way, deliveries can go on even if your provider is delayed because of a shortage or a problem with the supply chain.

• Make cost reductions.

Overspending is a frequent problem for e-commerce businesses. For instance, it’s fantastic to provide your staff with subscriptions to fashion magazines so they can stay current on trends if you sell clothing. However, if you’re attempting to save money, you can choose free resources and minimize your spending wherever you can.

• Acquire a business credit card.

Having a credit card will guarantee that you’ll always have access to cash in an emergency. You can receive a short-term loan, for sure, but if you pay off the balance on a credit card within a month, you won’t have to pay interest. Keep in mind that it is ideal to utilize your credit card as an emergency fund and make on-time repayments. Credit cards have higher interest rates and can be very expensive.

Cash flow is crucial when discussing strategies for combating inflation. It can significantly contribute to maintaining your profitability and fostering growth.

Why Understanding Inflation Is Important

Inflation can be viewed as a hidden tax, according to Nobel laureate Milton Friedman. Even if you don’t pay it directly, it continually pulls money out of your pocket. It implies that it does this by lowering your purchasing power.

When making financial plans for both your business and yourself, inflation must be carefully taken into account. If inflation is 8%, even a 5% rise in revenue results in a loss for the consumer.

Similar to this, investing in savings accounts doesn’t make much sense when inflation is high. You are losing money if you keep emergency funds for your e-commerce company in any account that pays a rate that is lower than the current rate of inflation.

Your expansion strategy will be impacted by ecommerce inflation as well. You’ll need to generate more income to cover capital expenditure as assets get more expensive and your current funds continue to depreciate.

Your cash flows will need to be reevaluated most crucially. During an inflationary period, your outflows of cash will rise. You must cope with inflation since it can jeopardize your ability to do business as usual.

Final Thoughts

Your finances may be impacted by e-commerce inflation in a variety of ways. It’s time for ecommerce business owners to reassess their finances and develop a strategy to deal with inflation in light of the fact that it’s at a 40-year high. Knowing how to handle inflation will put you in a better position to plan your growth during an inflationary environment.

Although it’s a good place to start, you’ll need to take additional steps.

Search for vendors who can provide lower costs, and consider additional expenses you may save.