How Small Businesses Can Deal with Rising Inflation
This article discusses:
- Inflation and the current economy
- The types of businesses that are more vulnerable to inflation
- Businesses that do well during inflation
- Ten ways a small business can deal with rising inflation
The last two years have created quite a challenge for the American economy and small businesses. To start with, the pandemic seemed to create a domino effect of worker and supply chain shortages, a volatile stock market, and price increases, all of which have culminated in rising inflation. War concerns have now been added to the mix, and the world watches and waits as Russian President Vladimir Putin invades Ukraine. Many of us are left wondering what’s next. For small business owners, it’s natural to be concerned about how inflation will affect their business and profitability. Many wonder how their small business can deal with the rising inflation. In this article, we’ll explore how you can not only circumvent inflation but grow your business and thrive under the current economic landscape.
What is inflation?
According to a National Federation of Independent Business survey, 22% of small business owners say that inflation is their most important problem.
Inflation occurs in the economy when the price of goods and services increases over many months, while the value of money decreases. In other words, it takes more money to buy less. The dollar loses its purchasing power, and what may have cost $100 a few months ago now might cost $110.
In the past year, you’ve probably noticed this happening with items you regularly purchase, from business supplies to personal expenses, such as groceries and gas.
Many things cause inflation, including:
- Supply disruptions and shortages
- Increased consumer demand, without an increase in supply
- Federal Reserve actions intended to thwart consumer defaults
- The devaluing of currency
Some small businesses may find it challenging to stay afloat when dealing with inflation. Thankfully, there are ways to counter the effects of inflation and potentially even grow your business.
The current economy and inflation
While mega corporations are more likely concerned with Wall Street, the Nasdaq, and the Dow Jones Industrial Average, entrepreneurs are more focused on what inflation means for their local economy and, more importantly, their small businesses.
In January of this year, the inflation rate rose to its highest level since 1982, reaching 7.5%, resulting in increases across the board, with food, electricity, and shelter seeing the highest rise. And according to a report by the Bureau of Labor Statistics, the Consumer Price Index (CPI) also increased 0.6 percent in January. The CPI is a metric that defines how much the price of consumer goods, raw materials, and services has changed over time.
The indexes for healthcare, clothing, vehicles, and household operations and furnishings also saw significant increases in the past year, signaling inflation. The energy index alone increased by 27%.
What does this all mean? It means the U.S. economy is likely to see continued inflation in the near future, and everyone is likely to feel the impacts of inflation, including consumers and small businesses. Therefore, it’s vital for small business owners to identify ways to mitigate the effects of inflation on their businesses.
What types of businesses are more vulnerable to inflation?
Certain types of businesses are more likely to experience downfalls due to inflation. These include companies that carry extensive inventories or supplies, as well as industries like retail, manufacturing, auto, banking, and finance.
Some industries have more stable environments and aren’t as vulnerable to inflation. These industries include healthcare, real estate investments, infrastructure industries like utilities and oil, and vital consumer goods.
Even if you own a business that is more prone to inflation woes, there are some things you can do as a business owner to minimize its impact.
How do small businesses deal with inflation?
Every small business is impacted by inflation differently. For instance, you may be locked into contracts or unable to raise prices on your customers or clients. Meanwhile, the cost of doing business is likely going up and shrinking your business’s cash flow.
Because of perceived labor shortages, workers today are demanding more, and your business may not be in a position to pay employees more money. This could create a labor shortage within your own business if potential employees decide to work for a competitor that is better positioned to increase their salaries.
Depending on what type of business you own, you may already be experiencing a loss of revenue from the pandemic. The potential impacts of inflation could compound the problem unless you take measures to relieve inflationary pressures for your business.
Here are some things you can do to help your business deal with inflation proactively instead of leaving things to chance.
Analyze your business’s profit margins.
You’ll first want to evaluate the costs involved in doing business, then look at how your profit margins have changed in the inflationary economy. Then, you’ll want to find ways to grow your profit margins without sacrificing quality or service.
Minimize expenses for your small business.
Reducing overhead and expenses is an excellent first step towards countering inflation. You might have to cut unnecessary expenses like services you pay for but don’t use (always a good idea anyway).
If relocating your business would save money, you might consider a smaller, more affordable office or location for your business. But remember to consider your market and its consumers before jumping ship to another location. If an alternate location would make you less accessible to your most faithful consumers, it may be best to stay where you are.
On the other hand, if you have a business that can operate remotely or thrive as a delivery-only enterprise, it might be wise to ditch a brick-and-mortar location altogether, particularly if it will save money while growing your business.
If your company sells products or moves inventory, you might look for less expensive alternatives that still offer the quality your customers are accustomed to. Or, if you own an eatery or restaurant, you should consider an alternative supplier if they can provide you with similar ingredients at a fraction of the cost. The point is that every dollar saved can minimize inflation’s impacts on your business.
Perform a risk assessment of your supply chain.
A common problem that many businesses faced during the past two years was the unavailability of their products from wholesalers. For instance, many of us are familiar with chip shortages, which have slowed down the production of many types of products, from computers to automobiles.
Businesses that are at a higher risk of a supply chain meltdown are those that depend on one supplier for their products or use overseas suppliers that take a long time to move the product.
You can mitigate risks to your supply chain by alternating suppliers, finding domestic alternatives, and stockpiling the most vital supplies to your business.
Since inflation seems to be here to stay for the near future, stock up on your inventory and lock in current prices before they go up again. Depending on your business, this might be one of the most important things you can do, even if you have to take out a business loan to do it. At the same time, you’ll want to minimize inventory that rarely moves or is utilized.
Slowly increase prices.
Raising prices on your customers and clients is the last thing most business owners want to do. But in an economic climate where inflation continues to skyrocket, sometimes it’s necessary to have a price hike on some items. There’s a strategic way to do it that won’t send your customers running. Do it slowly and a little at a time.
Renegotiate contracts if possible.
Reach out to your suppliers and contacts to see if it’s possible to renegotiate contracts early. It’s best to lock in lower prices as soon as possible before they go up again.
Don’t stop attempting to grow your business.
You want to stay competitive in your market and continue to draw more customers to your business. Use this time of high inflation to attract new consumers and build on your current customer base.
Consider creating a marketing campaign that differentiates you from your competitors. Set your business apart by creating a stellar customer experience and making your consumers feel valued and appreciated.
Offer more services or products to bring more value to them. The point is, by offering your customers more when it seems the business climate is delivering less, you’re more likely to win new clients for your business. (And remember, all of your competitors are facing the same problems you are, so there’s still room for you to create a competitive advantage).
Streamline your business.
Streamlining your small business can involve anything from automating and improving processes to investing in business software, to installing new features in your business to help improve workflow.
One of the most significant expenses for small businesses today is personnel. With a labor shortage and increased demands for higher wages, automating or streamlining some of your business’s processes can reduce labor costs for your business. And that means more profitability for your business.
Consider worst-case scenarios when making decisions.
For instance, anticipate that your supplies and inventory will rise considerably, possibly up to 50%. Also, count on your company’s bottom line feeling an impact if there is a disruption to your business’s supply chain. Then determine how much cash you’ll need if the worst were to occur. Consider what you can do now to minimize the risks to your business.
Get a business loan.
The fact is that even though things may seem uncertain, it’s probably the best time to get a business loan. Interest rates are lower now than they probably will be in the coming months as the Feds are expected to raise rates three times this year.
Meanwhile, inflation is likely to get worse before it gets better. You can use a business loan to bolster your business’s cash flow or operational expenses. A loan can also help you reduce your overhead when you use it to consolidate bills or refinance other higher-interest business loans.
A business loan can also help you increase your inventory now before prices get even higher. Or, you can look for new investment opportunities for your business to help it grow.
There are many ways a small business loan can help restructure your finances and make it easier to deal with inflation. For example, Troy and Raquel Binns used a loan to help their Brooklyn-based martial arts studio grow through the hardships of the last couple of years.
Begin counter-inflationary measures today.
This may be obvious, but no matter how you respond to inflation, you should start today, rather than tomorrow. Inflation is here, and according to many leading economists, it’s likely to worsen, so get ahead of the game by implementing these measures as soon as possible.
The Bottom Line
Inflation is an understandable concern for business owners. After all, it contributes to the overall rising costs of doing business. But the key to thwarting its effects is to proactively seek ways to mitigate the impacts of inflation on your business.
Invest in your business where it counts and manage costs where it makes sense. Avoid the temptation to stop growing your business because staying in the game and focusing on growth is vital in helping your small business achieve optimum success, even in a challenging economy.