What is Inflation Doing to R&D-Heavy Businesses?

Inflation is a universal economic force, but its impact varies widely across sectors. For research and development (R&D)-intensive businesses, the effects of inflation can be particularly challenging. These businesses often operate with long development timelines, uncertain commercial outcomes, and significant upfront costs. As inflation increases, so too does the complexity of managing innovation and financial sustainability.

In this blog, we explore how inflation affects businesses focused on R&D, what risks and opportunities it presents, and how R&D finance can help these companies remain resilient in uncertain economic conditions.

Rising Input Costs and R&D Spending

At its core, inflation refers to the general increase in prices over time, which erodes the purchasing power of money. For R&D-heavy businesses, this means the cost of conducting innovation becomes more expensive across nearly every category:

  • Salaries and Talent: Attracting and retaining specialised technical staff, such as engineers, data scientists, or lab technicians, becomes more costly. Wage expectations rise as employees seek to maintain their real income levels.
  • Materials and Equipment: Whether it is high-spec laboratory instruments, specialised software, or imported materials, inflation pushes up procurement costs. Many of these inputs are essential for core R&D activities and cannot be easily substituted or scaled back.
  • Overheads and Utilities: Leases, electricity, internet, and other ongoing operational costs also increase. These may seem peripheral to innovation but are critical to sustaining an R&D environment.

As these costs rise, the same R&D budget no longer stretches as far. Businesses may find themselves forced to delay, downsize, or reprioritise their innovation initiatives. The higher cost of doing business can dampen economic growth if investment slows down as a result. In many sectors, price increases for goods and services are further amplified when inflation rises quickly or unexpectedly.

Cash Flow Pressure and Budgeting Challenges

R&D-focused companies often have irregular revenue streams and rely heavily on external funding, tax incentives, or investor capital. Inflation introduces another layer of volatility, putting pressure on already stretched cash flows.

Budgeting becomes more difficult. Assumptions made at the start of the financial year may become outdated within months. Inflation introduces variability into supplier quotes, project estimates, and workforce planning. This makes it harder for finance teams to forecast accurately or allocate resources with confidence.

As the rate of inflation increases, so do higher prices across operations, while raising prices to offset costs may not always be feasible in competitive markets. Additionally, the broader economic response to inflation, such as raising interest rates, increases borrowing costs. These higher interest rates can significantly affect financial planning, particularly for innovation-driven businesses already managing long timelines and deferred returns.

For eligible entities, the Australian government’s R&D Tax Incentive (R&DTI) remains a critical source of support. However, since the rebate after your tax return has been processed, there is a lag between when R&D expenses are incurred and when the cash is received. This delay can be problematic when businesses need to fund rising costs now, not months later.

The Strategic Role of R&D Finance

R&D finance provides a solution to this timing mismatch. Rather than waiting for the end-of-year rebate, eligible businesses can access a loan based on their year-to-date eligible R&D expenditure. This means they can draw on their expected refund sooner and use those funds to maintain momentum in the face of inflation.

When used strategically, R&D finance helps:

  • Preserve innovation timelines without cutting scope
  • Retain high-performing teams by avoiding salary freezes or redundancies
  • Offset increased input costs from inflation
  • Fund short-term growth initiatives, like product launches or trials

In environments where interest rates rise, traditional loans can become more burdensome. R&D finance provides a more tailored and potentially cost-effective alternative for eligible businesses. This is especially true during periods of rising inflation, where cost predictability becomes even more difficult to manage.

Importantly, R&D finance is not a replacement for the R&DTI, but a cash flow tool that complements it. Businesses must still claim the R&DTI and must have already accrued the expenditure against which they are borrowing.

Long-Term Risks of Pulling Back on R&D

It might be tempting for companies to scale down R&D spending during inflationary periods, especially when costs are high and immediate returns are uncertain. However, this can lead to longer-term strategic disadvantages.

Cutting R&D may reduce near-term financial strain but risks stalling progress on future revenue streams. It can also signal to investors or partners that a business is entering defensive mode, potentially weakening its perceived value.

Consistent investment in core R&D activities is often a key indicator of future competitiveness. Especially in high-growth sectors such as technology, biotechnology, and clean energy, the businesses that weather economic challenges while continuing to innovate often emerge stronger.

Maintaining R&D investment also sustains consumer demand for new and improved solutions, which supports long-term economic growth.

Practical Actions for R&D-Heavy Businesses

Here are several strategies to help businesses navigate inflation while continuing to invest in innovation:

  • Reforecast Regularly: Update financial forecasts quarterly or even monthly to reflect inflation-adjusted costs. Build in contingency buffers.
  • Prioritise High-Impact Projects: Focus limited resources on projects with clear commercial potential or strategic importance.
  • Use R&D Finance Thoughtfully: If eligible, use R&D finance to bridge cash flow gaps. This allows continued investment without waiting for end-of-year tax processes.
  • Communicate with Stakeholders: Investors, lenders, and board members understand inflation is a factor. Being transparent about your response plan builds credibility.
  • Review Contracts and Suppliers: Where possible, renegotiate supplier terms or seek more cost-effective options that do not compromise quality.
  • Benchmark Against Peers: Understand how others in your industry are adjusting their R&D investments. This provides context and may reveal opportunities to collaborate or co-invest.

Inflation, R&D, and the Bigger Picture

Inflation challenges the operational rhythm of R&D-heavy businesses but does not eliminate the need to innovate. On the contrary, economic uncertainty often creates openings for new solutions, efficiency improvements, and market shifts. Staying agile is key.

Financial tools like R&D finance are designed to give companies breathing room. By unlocking part of their accrued rebate early, businesses gain the flexibility to respond to short-term pressures while staying committed to long-term development goals.

At Rocking Horse, we specialise in supporting innovative companies through tailored R&D finance solutions. We do not determine R&DTI eligibility or offer tax advice, but we do help eligible businesses turn their year-to-date R&D spend into working capital they can use today.

Smart Moves in Tough Times

R&D is a long game. Inflation might be a short-term disruptor, but with the right financial strategy, businesses can continue to invest in their future without sacrificing stability. For founders, CFOs, and innovation leads, the challenge is to adapt quickly without losing sight of core goals.

Understanding the impact of inflation on your operations is critical. R&D finance offers one way to ease the pressure. If your business has claimed the R&D and is navigating inflation’s squeeze, get in touch with Rocking Horse to learn how we can support your plans.