High inflation can hit small businesses extra hard. Small businesses operate on smaller budgets and tend to have less cash at the ready than large corporations. Keep in mind, there are strategies small businesses can employ to navigate inflation.
Careful financial planning and cash flow management in both times of stability and inflation are the keys to preparedness. Assessing ways to reduce business costs, expand markets, and evaluate business pricing strategies can all help combat rising inflation. By preparing and making smart moves, your small business can weather inflation and come out even stronger.
What are the effects of inflation on small businesses?
Inflation is defined as an increase in price of goods and services as measured by the Consumer Price Index (CPI) in the U.S. The greatest effect of inflation on small businesses is the increase in expenses and business costs, including raw materials, supplies, machinery, fuel, and labor. Inflation can cause disruptions in supply chains due to the rising costs of labor and fuel.
Not only do business expenses increase, but sales can decline because inflation leads to declines in consumer spending. Consumers have less purchasing power as their disposable income declines, so small businesses might see lower demand for their products and services, especially if they are nonessential.
These factors make it difficult for small businesses to engage in financial planning during inflation. While you should always attempt to stick to your small business budget, you should be prepared for fluctuations in expenses and lower profit margins during times of inflation.
There are additional steps you can take to help your business deal with rising inflation.
Strategies to manage inflation
- Streamline costs and business expenses
As a business owner, it’s a good idea to constantly reevaluate your fixed costs and expenses, but this is especially crucial during times of inflation. As the price of raw materials, fuel, machinery and other inputs continue to rise, you should look for any chance to cut back on expenses. Look to expand your list of suppliers and search for those with more competitive prices. Therefore, if your main suppliers’ prices increase, you will have other options. Whenever possible, lock in prices in supplier contracts to avoid fluctuations. Be a tough negotiator to get the best deals you can.
Look for ways to cut costs across the board. Evaluate your production line for opportunities to cut back. Explore how technology, including artificial intelligence (AI), can help cut costs throughout your business. Automation can be used in several areas to save time and money and increase productivity. These include sales and marketing activities, customer communication, and social media campaigns across multiple platforms. Automation can also be used to streamline project management, human resources, and inventory management.
Look into outsourcing certain services such as IT and accounting.
Shop around for less expensive office space, storage, leased equipment etc. Try to increase energy efficiency and decrease utility usage if possible.
- Optimize cash flow
Explore the best ways to manage your business cash flow during inflation. You will need to balance how much cash you have on hand with staying on top of your financial obligations. Over time, you will have a better grasp of this balance as the market ebbs and flows. Look for ways you can access cash to deal with unexpected costs if needed.
You can also examine your inventory and look for where you can sell off stock if needed for a cash infusion.
You might also want to consider a line of credit or a small business loan from a bank that specializes in small businesses such as Live Oak Bank. Working capital loans can be a smart way to keep your business financially healthy. By looking into these options ahead of time, you can be prepared when inflation hits.
- Look for growth opportunities
One of the best steps you can take is to try to expand sales wherever possible. Evaluate the current market for your products and look for growth opportunities. This could be the time to seek out new customers and expand into new markets. Look at how you can increase your business offerings. Are there ways you can your expand services? Consider partnering with other businesses on special projects, for which you might draw a new customer base.
- Evaluate pricing strategies
Continuously reevaluate your business pricing strategies to combat rising inflation. Perhaps the biggest question you will face during times of high inflation is whether or not to raise the prices of your products. You will need to weigh the need to bring in more money to cover rising costs against the possibility that increasing prices will result in lower sales.
If you increase pricing, consider a gradual increase in price over time so that you don’t shock your customers. Be sure to communicate openly with your customers about why you are increasing prices. Perhaps you can offer special deals for your loyal customers—bulk pricing or subscription discounts. Do whatever you can to keep your existing customers as it’s more expensive to seek out new ones.
You can also evaluate your product offerings and focus on strategies to increase sales of products that yield higher profits and cut production and sales of products that yield lower profits.
- Retain employees
Don’t forget to pay attention to how inflation is impacting your employees. Keep communication open. Do the best you can to retain and invest in your employees. You don’t want to lose your best people to competitors during tough times as the cost of hiring and training new people will likely outweigh retaining trained, loyal employees.
You can also involve your employees in your budgeting process. Seek their opinions on opportunities to grow sales, expand markets, and where to save. The more they are invested in your success, the more loyal they will be.
In times of inflation or stability, financial planning is key to the success of your business. Staying on top of your budget and finances will help keep your business running smoothly and profits maximized.
By employing smart strategies to survive inflation, your business can become stronger for it. Once costs stabilize, you could see even higher profits down the line.
