What is inflation and how to recognise it 🔎
Inflation is a phenomenon in which the general prices of goods and services increase over a certain period. ? In other words, your purchasing power decreases because you can purchase less with the same amount of money. Let’s illustrate this with a simple example:
Suppose you could buy an apple from the previous year for €0.90. Today, however, you are paid €1.07 for the same apple. In other words, you can no longer buy an apple with that €0.90. So your money has become worth less and your purchasing power has decreased. 🍎
It is important to note that inflation is an overall phenomenon and is not limited to price increases from some products or services.
Did you know?
We only really speak of inflation when there is a general increase in prices over a wide range of goods and services.
Effects of inflation on sole proprietors
| Purchasing power of your income drops 💶 | The cash flow coming in from your business activities loses value as inflation rises. |
| Adjustment of your selling prices 💰 | To cope with inflation, you will probably have to raise your selling prices. Otherwise, you will make less profit. |
| Borrowing money becomes more expensive 🏦 | This makes it more expensive to raise finance for investment or working capital for your business. |
| Paying money off becomes cheaper 📉 | Fixed interest keeps monthly instalments stable, while income can increase with indexation (if you are also salaried). |
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How to manage inflation risks as a sole proprietor
| Respond to price fluctuations📈 | Constantly monitor market prices, gradually adjust your rates to retain customers and not scare them away. |
| Critically evaluate business expenses💰 | Reduce waste and unnecessary costs to maintain profit margins without price changes. |
| Invest in quality and efficiency🔰 | Optimise business processes for greater productivity and efficiency. This helps absorb inflationary increases without losing profitability. |
| Communicate openly and honestly💬 | Be transparent to customers when prices change. Explain why adjustments are needed and show understanding of consumer challenges caused by inflation. |
The key is to anticipate and adjust 🔑.
As you can see, inflation has a far-reaching impact on your sole proprietors and your personal finances. The key is to continuously monitor developments closely and make timely adjustments where necessary.
Anticipate changes, update your business strategy and spending patterns and communicate openly with your customers. That way, as an entrepreneurial self-employed person, you can tackle the challenges of inflation and secure your long-term profitability. So don’t hesitate, but persevere!💪
