The Velocity Of Money, Inflation, & The Small Business

The velocity of money is a metric used to determine how frequently a currency unit is used inside an economic system. In simpler terms, your money is also other people’s money. When you spend money at the barbershop, the barber can purchase gas, and the station owner can use that money to take his children to a hockey game. Economists study how quickly currencies are exchanged between people or organizations because it speaks to the overall health of an economy.

Understanding how it is calculated is beyond the scope of this article; recognize that an increase in the velocity of money generally means an increase in inflation too. Though we are about to discuss why small businesses are particularly impacted by inflation, it is essential to note that not all industries are dampened by it. When you own a home, its value will likely increase alongside inflation. Coincidentally, the increased labor and supply costs lead to fewer homes being built. To take one step further, the increased home costs lead to more renters and higher rent prices. This is another prime example of how inflation affects the economy. 

How It Relates to Small Businesses 

Inflation significantly impacts our economy. For some small business owners, it is one of their most significant concerns. Why? For the same reasons that it costs more to build houses. Small business owners face higher costs connected to the raw materials they use to create their products. Because it costs more to live, employees seek higher wages. A method for adjusting to these pressures is to increase the amount you charge. However, this may be damaging for people in specific markets. Those that sell non-essential or “consumer discretionary” goods and services will be particularly impacted. 

Hotels, restaurants, and the automotive industry create products and services that can be replaced with less expensive alternatives during periods of high inflation. People may choose to drive an older car, purchase groceries over dining out, and postpone trips (or stay with friends and relatives instead of paying for a hotel). 

How the Small Business Survives 

As crippling as inflation is for small businesses, there is also no way to avoid it. Small businesses need to assess their goals during periods of significant inflation. One method some companies use is to find ways to cut the costs of raw goods and materials. Though it may seem counterintuitive, others invest in marketing. Having a stronger brand or message is one way to justify your higher costs. 

Again, some industries are not hindered by inflation. If you cannot increase your cash inside your business, find ways of doing it outside through investments. Those who are skilled enough, or have advisors, can anticipate periods of increased inflation. They can prepare for it by reducing costs to raise their capital to survive the next recession. 

Get in Touch with a Business Law Firm 

Our number one goal is to help your business grow. Cueto Law Group, P.L., is experienced in assisting companies in navigating complex challenges associated with international trade law, transfer pricing litigation, and litigation. We will help and advise you regardless of high or low inflation. Contact our office to schedule your consultation