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Text: How Inflation is Impacting Businesses

How Inflation is Impacting Businesses 

In July 2022, Singapore’s annual inflation rate rose to 7.0% from 6.7% the previous month, the fastest rise in consumer prices since June 2008.  Businesses across the country are feeling the effects.  How can we navigate this hurdle?

What is inflation and what caused it?

Inflation generally means a rise in the prices of goods and services over a period of time.  The current spike in inflation is primarily caused by pent-up demand post-COVID and the global supply chain disruption which has been exacerbated by the Russia-Ukraine conflict.  This also resulted in oil and gas prices soaring in anticipation of and response to the invasion. 

How inflation impacts businesses

Not all businesses are impacted by inflation in the same way.  For example, businesses that consumers rely on for essentials like supermarkets, healthcare, and education are less affected by inflation.

Anything that is discretionary (non-essential) will most likely feel the pain.  These businesses may experience:

Higher costs of inventory and raw materials

Your suppliers are likely to experience higher costs themselves and may need to raise their prices to cope with inflation.  This then increases your costs of inventory and raw materials.

Higher operating costs

When there is a significant rise in inflation, all costs around your business (like utilities and rent) will start to increase, including wages as salaries need to increase to compensate for the rise in the cost of living.  

The cost of logistics will also increase to cope with higher fuel prices and wages. 

Higher interest rates

Governments are known to use interest rates as a tool to help control the rate of inflation. They may tighten its monetary policy and increase interest rates to slow the heating economy and place downward pressure on demand.  As a result, you will see higher interest rates on your business credit facilities and mortgages. 

In July 2022, the Singapore cash rate stood at 2.15%, increasing from 1.66% in June 2022.

Fluctuations in foreign exchange rates

Inflation has a direct impact on the FX rate.  The Monetary Authority of Singapore (MAS) has tightened monetary policy four times since October 2021, allowing the Singapore currency to strengthen.  A stronger SGD allows businesses to import goods at a cheaper rate.  However, going too far will make Singapore’s exports become too expensive and less competitive against other countries.

Slowdown in spending

The higher price of goods and services, means customers are likely to reduce their spending.  Either delaying spending or removing discretionary spending entirely from their budget.

Navigating through the inflation

All the inflation impacts discussed above have a direct influence on your company’s bottom line.  So, how best to navigate a high inflation environment?

Monitor spending closely

Conduct an assessment of your company’s future spending and determine which expense can be delayed, reduced, or removed entirely.  Also, review your production process to find ways to reduce costs.

Explore government assistance

The Singapore government has recently rolled out a $1.5 billion package to help fight against inflation.  One initiative sees the government increase its co-funding share of wages up to 75% for local lower-wage workers under the Progressive Wage Credit Scheme.

The Government will also be rolling out a new Energy Efficiency Grant to provide SMEs in the food services, food manufacturing, and retail sectors with up to 70% support to adopt energy-efficient equipment in pre-approved categories.

Find out more here.

Obtain an external financing facility

Ensure your business has access to an external financing facility to help support cash flow and operations when needed.  Invoice finance is a great credit facility for when your business needs quick cash injections to help cover operating expenses by converting outstanding invoices into immediate cash.

Build a diverse supply chain

Address supply chain challenges and build up a diverse supply chain network to minimise possible future impacts.  

Continue to sell!

Reducing costs is one thing, but your business should still focus on growth to generate sufficient revenue to stay ahead of inflation.

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