The Consumer Price Index (CPI) showed an increase of 8.6% from May 2021 to May 2022, indicating that inflation is still skyrocketing at an alarming rate. However, the problem of growing inflation is not exclusive to the United States. In fact, increased inflation rates are currently impacting sixty percent of the world’s industrialized countries as well.
It’s been a long time since the United States has faced severed inflation along the lines of what we are experiencing now. Indeed, the United States hasn’t faced conditions similar to those we are facing now since the stagflation of the 1970s. That was 50 years ago, and many of today’s small business owners were either children or not even born yet in the 1970s.
As a result, it makes sense that many small business owners have been left confused about the best course of action to deal with the current inflation rates. Most small business owners are used to the regular inflation (typically around 2%) that they deal with on an annual basis. Small price increases are natural for dealing with this. But 8% inflation is a much different ordeal. It’s not easy to respond to such a situation – especially if you haven’t done it before or don’t know what will work and what will not.
We’ll start by saying that price increases are a common and understandable response among owners of small businesses to the effects of inflation. However, despite the fact that implementing this method may be essential in some circumstances, doing so too soon or too dramatically can result in you losing customers who are also dealing with the struggles of inflation. There are a lot of nuances to dealing with inflation, especially because raising prices is typically only worth it if your revenue is going to go up (not down on account of lost customers).
Let’s take a look at different strategies to insulate your company from the effects of inflation and guarantee that it continues to be successful. In this article, we’ll cover the following in detail:
One of the most straightforward strategies for small business owners to combat the effects of inflation is to reduce their overhead costs as much as possible. Pay close attention to the monthly service contracts you have and determine whether or not there is anything you can live without.
For example, are you still paying for shared office space even if you no longer utilize it? If that is the case, you can probably cut costs. Some subscriptions are essential to your business, and you cannot afford to cancel them. However, you may utilize some subscriptions or other services that your business does not need. Cutting these out can generate substantial cost savings, especially over time.
You can also attempt to negotiate new contracts and prices with your vendors. For instance, maybe you are still operating on an old contract with a vendor at prices from a time when you bought substantially less from them. If you are buying in a larger volume, you may be able to get them to give you some cost savings now. If this doesn’t work, you can also look for more cost-effective alternatives to your current vendors.
Make Cash Flow Your Top Priority
Cash flow is always essential for companies of any size, and the lack of available cash is the primary factor contributing to the failure of the majority of organizations.
A steady flow of income into your company during high inflation enables you to make payments to your suppliers and investments in new business prospects, all of which contribute to the smoother operation of your company.
Despite this, many companies struggle with maintaining a steady flow of cash. There are a few ways to help smooth out your cash flow. The best way to drive up your cash flow is to find strategies to get your customers to pay you and your company’s bills faster. This is not always easy, but there are methods for getting it done.
Another option is to draw out your payments to suppliers and creditors as long as possible. Paying your bills on the last day, they are due and getting extensions when possible can help you reserve cash in your business. You might also take into consideration giving new customers discounts for paying their bills in a timely manner. In addition, you can demand a down payment in advance for more expensive goods or services. This gets the cash from projects into your business faster than it would enter otherwise.
Naturally, you’ll want to be adaptable in light of the fact that both your customers and suppliers are experiencing the effects of inflation rates and may have their own cash flow issues. But you have to consider your business and its needs at the end of the day.
Reduce the Risks Associated with Your Supply Chain
When prices rise, it may have a detrimental effect on the supply chain that your company uses. According to the findings of one poll, supply chain issues have an adverse effect on almost half of all small enterprises.
Companies that give in-person services to their clients, such as contractors, are the most susceptible to danger. Nevertheless, companies are concerned about problems with supply chains that might result in financial instability across all sectors.
The following are some of the most significant challenges that you could face in the wake of inflationary pressures:
- A rise in the price of materials
- Shortages of materials and time delays
- Costs of transportation going up
Diversifying your purchasing over a number of different suppliers is the most effective strategy to reduce the risk associated with your supply chain. When it comes to dealing with price hikes, having too much dependence on a single supplier can leave you with few alternatives. Having a broad range of suppliers limits the risks associated with just one or a few suppliers raising their prices dramatically.
One way to be able to use different suppliers is to broaden your business and its offerings. If you broaden your business, you open yourself up to the possibility of investigating different goods and resources. This can help you maintain a diversified supply chain that limits your risks.
Automate as Much as You Possibly Can
Utilizing technological advancements to automate as many routine business chores and procedures as is humanly feasible is an additional strategy for combating inflation.
Utilizing technology does not have to be difficult. There is an abundance of software accessible in the form of applications that may assist you in managing tasks like accounting, customer management, and marketing. There are more software products available for small businesses to take advantage of than ever before, and they come with a wide range of price tags. This means that there are options suited for small businesses of almost every size and revenue.
You may achieve a higher bottom line in your company while spending less money if you make use of technology. This will free up your time and the time of your staff so that you can concentrate on more complex issues. Indeed, you can automate all kinds of things, including your sales pipeline, accounting, lead generation, job application collection, and more.
Pay Attention to the Issue of Retaining Employees
The repercussions of inflation are being felt by more people than just yourself. Your staff and the overall labor market are also feeling the effects of it as the prices of basic things continue to rise. However, as a result of the rise in inflation, your workers may anticipate an increase in the amount that they are paid.
According to a poll conducted by Payscale, 44% of businesses are experiencing employee turnover because of compensation. Your workers will probably anticipate that you will keep pace with, if not outpace, the rate of inflation in terms of salary increases.
There are other things that may be done to assist in alleviating the financial strain that your workers are under if you are unable to provide them with a salary raise across the board.
For example, reducing the need for workers to commute might result in cost savings for the business and your workers. You might also provide monetary assistance for expenses such as childcare, health care, school tuition, or homeowner’s insurance to ensure retention.
It is essential to have open and honest conversations with your staff members about the wage expectations they have. Inquire about the effects that inflation is having on their life as well as the sort of wage range or benefits package that might make things better.
It’s never good for a business to start losing a lot of employees. It can be hard to find good employees, and training new workers is always a challenge. Anything you can think of to try to reduce employee churn can help.
Give Some Thought to Establishing a Credit Line
If you want your company to continue growing and remain innovative, you will need to continue investing in your company. Obtaining a small business line of credit is one of the best ways to continue investing in your company while still maintaining a healthy cash flow.
If you want your company to continue growing and remain innovative, you will need to continue investing in your company.
Your company’s ability to fulfill its working capital requirements, issue pay raises to its workers, and invest in the future of the company may all be facilitated by establishing a line of credit.
When you take up a line of credit, one of the advantages is that you may withdraw money as you need it and only have to pay back what you really spend (with interest, of course). This enables you to keep one step ahead of the most recent difficulty that may arise.
As you can see from the several suggestions shown above, increasing your rates is not the only approach to safeguard your small company from the effects of inflation.
Not only will using these strategies make your small company more resistant to the effects of inflation, but they will also help to guarantee that it continues to generate solid profit margins.
Get Your Mentality Right
One of the most beneficial things you can do as a small business owner is keep an eye on your mentality and adjust it when necessary. This may seem to be a trivial matter, but in reality, it is of the utmost significance. Maintaining a positive and upbeat mentality and a well-defined game plan can help you weather the worst of storms.
Keep in mind that you do not lack any strength. You are in charge of determining the course of your own life’s events. Therefore, rather than focusing on what you can’t accomplish, give your attention to the things you can.
You need to choose what you want to accomplish and then take baby steps to get there. Get yourself organized and create a spending plan. Rewrite or update your business plan. Implement new software to help smooth out operations. Whatever you do, keep a positive mindset and double down on your efforts. The more you think positively and work to generate a better outcome, the more likely it is that you and your small business will succeed.
And most importantly, keep fighting until you win. These trying times will pass, and when they do, you want to be in a position to take advantage of new opportunities that will arise for you’re your business. Therefore, maintain a good attitude, be focused, and stay the course.
Establish Connections with the Appropriate Networks of People
Ensure that you are linked to the appropriate kinds of partners as a further essential stage in the process. To put it another way, you shouldn’t put all of your eggs in a single basket. This is particularly true during an economic downturn, when various businesses and sectors may be impacted in varying degrees by a variety of factors.
For instance, a recession may have a significant impact on the building business, while it may have a less severe impact on the retail sector.
As a consequence of this, it is critical to maintain as much variety in your clientele as is practicable. Because of this, you will be protected from any unfavorable consequences that the economic downturn may have on a certain business or sector, especially if it hits it particularly hard.
You won’t be able to withstand the storm, but if you have a varied spectrum of consumers, you can still be successful. Don’t ever forget how important it is to diversify your holdings; doing so may make all the difference when times are tough economically.
Safeguard Your Financial Situation
If you ask any person who is knowledgeable about finance, they will tell you that having some money set aside in case of an emergency is one of the most essential things you can do for yourself.
This is particularly true during difficult economic times, when job loss and other unplanned rising costs may swiftly derail your finances and put you in a difficult financial situation.
Your ability to weather any unanticipated financial storms that may come your way is significantly improved by maintaining a reserve of liquid assets in the form of an emergency fund. However, setting up a fund for unexpected expenses is not always simple.
It takes patience and self-control to put aside enough money to handle unanticipated costs, and it’s easy to give in to the temptation of using that money for something that isn’t an actual emergency. However, if you are able to keep to your plan and avoid the urge to spend money on things that aren’t absolutely necessary, you will be thankful that you did so in the event that an unexpected financial emergency arises.
Try to start putting money away now if you haven’t begun to do so already. A rainy day fund may be the difference between bankruptcy and survival in a tough situation.
Begin Making Investments in Yourself
During a recession, one of the most beneficial things you can do for yourself is to make investments in both your professional and personal life. If there is a certain ability you’ve been interested in acquiring, now could be a good time to get started on it.
You may improve your skills at a low cost and in a short amount of time by making use of the many tools and courses that are accessible online. Maybe that means learning about accounting or financial analysis so that you can cut down on costs associated with outsourcing those tasks. Or maybe that means taking some marketing courses so that you can learn to get the word out about your business in a more effective and cost-efficient manner.
In addition, there is a wealth of material available in the form of books and podcasts on the subject of personal growth that may assist you in weathering the storm and emerging from it in a more powerful position. Try reading up on how to grow your business, how to weather a recession, and more. There are so many entrepreneurs that have already faced many of the challenges you are facing currently or may face in the future. Reading about past experiences and how individuals successfully navigated challenges can make a world of difference.
So, don’t allow a slump to get you depressed. Make the most of this chance to invest in yourself so that you can face whatever is ahead of you in an even more confident and capable manner.
Pay Close Attention to Enhancing Your Abilities as a Salesperson
In unstable times, it is critical to be a good salesman. It should not come as a surprise that growing sales is always a feasible remedy for any problems your company may experience during a downturn.
Now is the time to start developing your sales talents if you haven’t previously become proficient in that area. Because, at the end of the day, during a recession or any other hard moment, the firms that are able to expand their sales – or mitigate the loss rate of previous customers and sales – will be the ones that survive and, in some cases, prosper.
There are so many unique ways you can generate sales and market your business. So, think outside the box and get creative. There is no reason you have to be confined to the traditional spheres of marketing if there are opportunities elsewhere.
Get Real about the State of Your Finances
The recovery from the pandemic depression has caused many smaller firms to incur enormous amounts of debt.
If you have already taken advantage of all of the stimulus packages to which you are eligible (here is a friendly reminder to seek forgiveness wherever feasible from the various pandemic-era government programs), utilize any remaining cash to pay down high-interest debt as soon as possible, particularly in light of the fact that interest rates are rising.
In point of fact, central banks have begun to raise interest rates as a means of assisting in the fight against inflation. Indeed, the Federal Reserve Bank of the United States anticipates further hikes in interest rates in 2023 in order to cool inflation. This will only make it more expensive and harder for small businesses to borrow money in the event of crises.
Even if you are unable to pay off all of your debt, you should make an effort to reduce the principal balance as much as possible on debt with a variable interest rate. This way, you can ensure that you are reducing your exposure to the increase in interest rates on account of the Federal Reserve’s recent rate hikes.
You might also consider renegotiating your existing loans or lines of credit with your bank or credit union in order to get cheaper interest rates. This may be difficult given the rise in interest rates, but sometimes it can be worth a shot.
If you are struggling with figuring out how to approach all of this, working with a financial counselor, accountant, or another finance specialist may help you in determining the approach that will work best for your specific situation.
There is no one who can accurately predict how long this inflation will endure or how severe its repercussions will be. However, one thing can be said with absolute certainty: It will be unlike anything we have encountered in the recent past. The U.S. has not seen this sort of situation since the 1970s when stagflation hit the U.S. economy during Jimmy Carter’s presidency.
As the owner of a small company, it is critical to be prepared to take actions to insulate you and your business from the impact of inflation. If you follow the advice given above and remain committed to researching and learning more about how to protect your business from inflation, you can increase the odds that you will be able to insulate your business from the damaging impacts of inflation.
With the right approach, you can navigate rising price levels with deft and acumen so that, at the end of the day, your business can emerge from this period stronger than ever before.
At Biz2Credit, we pride ourselves on our commitment and dedication to the nation’s small businesses and their owners. We work each and every day to provide small business owners with the tools they need to help their businesses succeed in both the short term and the long term. As part of this, we run our Biz2Credit Blog, where we post new content each weekday. So please continue to check back here for all the latest information on news, trends, and events impacting small business communities.