It is important to know how small businesses respond to inflation appropriately in these times.
As we speak, inflation is hitting record-breaking levels — the worst of which we've seen since 1982.
This can be especially tough for small businesses dealing with many post-pandemic challenges, including labor shortages and supply chain issues.
Inflation can take a significant financial and mental toll on business owners, but it's important to know that there are things you can do to get through it.
This article will tell you what you need to know about how small businesses respond to inflation.
What Is Inflation?
Inflation is when money loses its purchasing power. In essence, the dollar you used a few years ago won't buy as much today.
There are several reasons why this can happen, including an increase in the supply of money or the raised prices of products.
Inflation doesn't have a good reputation. Everyone from investors to policymakers to the average consumer tends to suffer when inflation happens. Everyday essentials, from gasoline to groceries to cars, have become more expensive than they were.
When it comes to broader economic trends, there are benefits of inflation. But it is mostly hitting small businesses where it hurts the most.
Learn more about the causes of inflation
Interest Rates and Inflation
refer to the cost of borrowing money. On the other hand, it's the compensation for the service and the risk of lending money to that person. Both sides are essential to keep the economy moving by allowing people to borrow and spend money.
These rates constantly change depending on the economic landscape and the type of loan.
Rising interest rates typically occur during periods of inflation because lenders must compensate for the lower amount of purchasing power they will pay in the future for the loans they make
Also, the Federal Reserve closely monitors the economic landscape and adjusts the federal funds rate to help control inflation. They hope to decrease consumer demand by increasing rates, which can help bring prices back to normal.
Effects of Inflation on Businesses
Over the past few years, many small business owners, regardless of the sector, have experienced increased business costs. These include raising prices in electricity, gas, food, rent, paper products, shipping, transportation, and maintenance.
This has made running a business harder than ever to run. Suppliers raise prices, employees ask for higher wages, and customers spend less. Bottom line, inflation can seriously impact your incoming cash flow by:
- Increasing expenses
- Lowering profit margins
- Decreasing consumer demand
How Does Inflation Impact Small Businesses?
This is a real concern for small businesses
because it means the money you're saving right now won't be worth as much tomorrow. It can lower your ability to purchase and even your ability to retire.
Small businesses struggle to have the flexibility that large corporations have to fight rising inflation — but they are just as crucial to the economy.
There are ways that small business owners can mitigate the adverse effects through different solutions to inflation.
How to Combat Inflation As Resilient Small Businesses Do
Knowing how small businesses respond to inflation in the best way is one of the options to survive at this time
No matter how challenging periods of high inflation can be, the truth is that there are always resilient businesses that seem to weather the storm during economic downturns.
Here are several ideas you can apply to your small business to help survive inflation effects and rising costs.
One of the biggest ways that small businesses suffer is supply chain disruptions and higher costs of inflation for things like raw materials and services.
For example, domestic shipping rates for goods transported by road or rail have been 23% since 2020. Any companies that rely on this have to absorb these higher expenses.
See where you can cut wasteful expenses in your business. Ask yourself if there are alternatives to the transportation system that you use. If you can cut waste, you can help your cash flow stay afloat and save money.
Refocus on Profitability
Focusing on your profitability is crucial when going through rising prices in inflation.
For example, if you're spending more on raw materials and aren't raising your prices, it lowers your margins. If you sell a $10 wholesale item for $15, but now that original item costs you $11, you're looking at a 20% decrease in profit.
Look for strategic changes to raise profitability
. This could mean buying in bulk to lower the price per unit. It could mean getting rid of underperforming products from your business.
Use Financing to Manage Cash Flow
Several flexible funding options exist to help small businesses survive inflationary pressures. You might consider getting solutions like a business line of credit or a merchant cash advance to help with cash flow. TIPS inflation bonds (treasury inflation-protected securities) are another option.
Here we will show you how to prepare a Cash Flow Statement.
Rethink Pricing and Marketing Strategies
Instead of raising prices, consider zoning in on increases in a specific product or service where customers will most likely be receptive to changes. Make sure to pay attention to competitors' changes to stay aligned with the market.
Focus on boosting sales through new and creative marketing approaches and cutting unnecessary costs.
This can include cross-selling to customers, discounts, and special promotions. small businesses owners
Learn other ways to manage your money
Lock in Long-Term Agreements
When it comes to vendors and suppliers, try to get long-term agreements.
You can negotiate rates by offering to pay more upfront or shortening your window.
This goes for your building, as well. See if you can speak to your landlord about a longer lease with agreed-upon, fixed increases. This will give you better control over your expenses in the coming years without nasty surprises happening at inopportune times.
Consider Delaying Expansion
In periods of uncertainty like now, it might be wise to delay significant investments into your company. However, investing can also be opportune when the economy is weak. What might work best for one company might be entirely different for the next. Deliberate over what the best option is for you.
Consult With a Financial Advisor
You don't need to make any of these decisions alone. Look for an experienced financial advisor to help guide you through this challenging period. They can help you identify the best strategies that work for your business goals
, risk tolerance, and financial situation.
What is Business Resilience?
Business resilience refers to an organization's ability to quickly adapt to disruptions (like rising inflation) and maintain business operations while protecting people and assets.
Business resilience planning is vital because it's insufficient to "recover" from natural disasters, workforce challenges, cyber-attacks, or economic recessions.
It's essential to build a business resilience plan that includes elements like:
- Business impact analysis
- Risk management
- Emergency communications plan
- Risk assessment
- Testing and running exercises
- Emergency management plan
- Incident response plan
Several factors make a business resilient. This can include:
- A positive attitude towards change
- An open mind to new technology
- Active future planning that can be quickly adapted
- Regular monitoring of recent trends
- Adaptability to react to new challenges
It's critical to bake these characteristics into your business to weather the storm through periods like this.
Creating a resilient, independent business can help you survive future emergencies and outlast your competitors. Here are seven quick tips you can do to make your business more resilient:
- Plan your response to potential problems
- Appoint a risk management leader
- Diversify your cash flow
- Improve visibility in your inventory
- Know how to access economic relief
- Back up all important files and documents
- Invest in cybersecurity
These can help you be more prepared for the future.
Resilient Small Businesses Respond to Inflation Through Growth
That's everything you need to know about how small businesses respond to inflation.
Inflation can be a painful experience for both consumers and businesses, but there are always steps and strategies that you can use to protect yourself and your business. Ultimately, your business will come out stronger than ever on the other side.
Learn about financing options for small businesses
FAQs on How Small Businesses Respond to Inflation
What Does Inflation Do To Small Businesses?
Consequences of inflation include raising the price of everything from raw materials to services to transportation. This can lead to lower margins and eventually unhealthy cash flow.
Is Inflation Good or Bad?
Inflation is not technically a bad thing. In fact, the government wants around 2-3% inflation, which can signify a healthy economy. However, too much inflation can be terrible for consumers and businesses.
Who Controls Inflation In the US?
The Federal Reserve tries to control inflation by influencing interest rates. When inflation is high, the Fed raises interest rates to slow the economy and lower inflation. The Fed lowers interest rates when inflation is too low to stimulate the economy.