The supply chain disruptions and rising prices of the last two years show no signs of easing up. According to the NFIB Small Business Optimism Index, small business owners’ optimistic outlook for the rest of the year has dropped 1.8 points since January 2022 – and 22% of them give inflation as the reason behind their pessimism.
Inflation rates just reached a 40-year high, leading many small business owners to wonder – what’s next? If you’ve been feeling the crunch, here’s how you can expect inflation to impact your business.
The Effects of Inflation on Prices
Rising supply and commodity prices impact your bottom line. Prices have been rising steadily since 2020, and you’ve probably had to raise prices to keep up. Since the pandemic began, most small business owners have seen an over 20% increase in costs.
But the problem with continually raising prices to cover cost increases is that consumers aren’t always willing to pay higher prices. Consumers have dealt with job loss or furloughs during the pandemic, and many are feeling the pinch as gas and food prices rise. The demand for your business’ products or services might not be price resistant.
If you’re unable to raise prices to cover increased cost of goods you might have to find ways to lower costs in other areas to stay afloat.
The Effects of Inflation on Wages
“The Great Resignation” is a term that’s entered popular culture. Whether forced out of the job market in order to take care of children, seeking a new job, or unwilling to risk their health in a public-facing job, the labor market has seen seismic shifts the past two years. Small business owners have struggled to fill open positions – 47% of them reported job openings they couldn’t fill in the NFIB survey.
Inflation is only going to make the problem worse. Employees might request raises to cover their increased cost of living. New hires are likely to ask for a higher salary up front. In March 2022, almost half of small businesses surveyed by NFIB reported raising employee compensation.
In a tight labor market, with strong demand but lower supply, expect inflation to drive up the cost of labor.
The Effects of Inflation on Profitability
As your business feels the pressure from both sides – materials costs are rising, labor is both difficult to source and more expensive – it will inevitably have an impact on your profit margin. Since the pandemic, 47% of small business owners have seen their profit margin shrink due to inflation.
Unchecked, and if you take no steps to combat inflation elsewhere in your business, expect to see your profit margins continue to shrink.
Combatting the Effects of Inflation on Your Business
There’s little a business owner can do to stop inflation, but you can adopt strategies to minimize its impact on your business.
Buy inventory now
If you have the cash, consider stocking up on non-perishable inventory now. Analyze your inventory and sales for the past two years. Which products have both sold the most and had the highest price increases? If you suspect that their wholesale price will continue to rise, it might be worth it to buy in bulk or stock up now – even if you have to take an inventory business loan to do it.
Don’t forget to consider the costs of warehousing excess inventory when placing your order. However, after years of supply chain issues, many small businesses have excess space that they could fill.
Get serious about tracking expenses
When cash is flush and the business is doing well, it’s easy to lose track of where you’re spending your money. But when you need to keep an eye on the bottom line, get serious about tracking your expenses. Consider investing in software to track expenses, or working with an accountant – the initial upfront cost will be paid off when you likely find places to save money.
Cutting expenses will help offset inflation’s negative impact on your profit margin.
Raise prices but add value
Sometimes you have no choice but to raise prices and hope that customers stick around. But if you want to do more than hope, compensate for the raised price by adding value elsewhere.
Consider offering better service – curbside delivery, concierge shopping, more convenient ways to book appointments online – whatever fits your industry. Offer bundling discounts if customers buy multiple products, or a free gift with purchase. Consider starting a loyalty program, and listen closely to customer feedback.
Work on retaining employees
Now, more than ever, your employees need to feel valued and supported. If you lose key employees, it could take significant time to replace them. Plus, you’ll likely have to pay a higher wage to a new hire.
While you can offer salary and wage increases to help them handle inflation’s impact on their budget, that’s not always possible for many employers. Instead, think about offering non-financial perks that employees value – remote work, flexible work hours, more control over their shifts, flexible paid time off and wellness programs.
Apply for a Business Loan
The pandemic threw a wrench into many businesses’ cash flow projections. It’s becoming even harder to predict consumer spending as customers feel the pinch of rising prices. If you’re concerned about future cash flow, apply for a loan.
Applying for a business loan as inflation is rising, but before it’s expected to rise further, is a prudent business move. You’re not only ensuring that you’ll have the cash available to run your business, the dollars you borrow go farther. When you pay back the loan, it will be with cheaper dollars.
Invest the loan’s funds in ways that will help your company weather an inflationary period. Small business owners might want to
- Buy inventory in bulk to avoid paying more for it later
- Invest in employee retention programs
- Increase marketing to attract new customers, and invest in programs to retain existing customers
- Purchase software, technology, or other equipment to streamline operations, help with inventory management, or track and reduce expenses.
Streamline and automate processes
With labor costs rising, ask yourself what you could do to cut down on labor hours. Would an investment in new inventory tracking software, or a new warehouse management system, pay off in increased efficiency and lower labor costs? That one time investment could pay for itself as labor costs continue to rise.
Examine business processes and identify possible areas to automate. Is there software that could automate your scheduling instead of paying a front desk person? Could you accept online orders, bill, or collect payment automatically and online?
Not only could streamline and automating processes save you money, customers may appreciate that it’s easier to work with you.
Running a business always has its challenges, and this has never been more true during the last few years. While inflation could have a negative effect on your business, you can turn it into a positive by taking steps to manage it and seeing it as an opportunity to improve.