Inflation squeezes profit margins and can cause companies to produce products that sell for less, in real terms, than the cost of production. This, of course, is a recipe for losing customers and, ultimately, bankruptcy in the long run. High rates of inflation can create pressure on wages, inventories, and operational expenses. However, stable and low inflation is good for an economy. A company can fulfill demands through an increase in production. A slow increase in price level helps keep businesses profitable and prevents consumers from waiting for a better deal at a lower price.
Graph: Inflation rates of Nepal from 2004 to 2013.
Small and upcoming businesses in Nepal are having problems trying to cope with the high inflation rate of 7.50 percent at the end of October 2014. But on a brighter note, inflation has been decreasing from a whopping 12.6 percent in 2009. Nepal’s high and unfavorable inflation rate damages startup companies, sole property owners and small businesses suffered the most as people spent cautiously. According to Graph Nepal, the average interest rate from commercial banks is between 11 to 14 percent, which makes it even harder for businesses to borrow.
As a small business owner, my family has also faced these above mentioned challenges. During moderate inflation, buying capacity increases. However, high inflation barricades frequent money spending. As a result, retail clothing shops like the one I own face challenges such as decreasing sales and minimal sales growth during festive seasons. One such problem is low sales of sweaters during winter due to high inflation rates affecting the price of cotton or wool in preceding months. Consumers will wait out the price hike resulting in low sales and lower earnings. In addition, our spending capacity will also decrease and thus make it harder for us to buy inventory from our wholesalers. Our operational cost that includes salaries and benefits, inventory cost, and rent also rises. Sometimes to pay salary and wages, we have to use personal money or even savings.
We import our inventory, mainly from India, about every two months. India’s inflation or deflation rate directly affects our business. Although we do not have to worry about the exchange rate since Nepalese currency is pegged with Indian currency, we do need to keep an eye on price levels in India. This is an external business environment that our business has no control over. So for damage limitations, my family is working on a strategy to import raw materials during low inflation in India and further process them in Nepal.
It is clear that inflation plays a crucial role on every aspect of an economy. However small or big your business might be or how well the economy is doing, inflation plays a significant role in business decision making. Small businesses, especially like mine, should be extra careful toward future price changes and make necessary adjustments.