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Rising prices have been making headlines and forcing both business owners and everyday workers to make tough decisions. Inflation rose 7.5% in January 2022, the highest rate in 40 years. Although everyone has felt the effects of inflation in recent months (especially drivers), small businesses owners often bear the brunt of inflation’s impacts.
What is inflation?
Inflation happens when demand outweighs supply in an economy, causing prices across sectors to go up. Inventory, supplies and labor costs have all been problematic in recent months, causing difficulties for small businesses in nearly every sector of the economy. According to recent data from the Bureau of Labor Statistics, more than half of small businesses had to raise their prices since the beginning of 2022, the highest percentage since 1974.
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How inflation affects small businesses
Inflation poses three main problems for small business owners. First, it causes consumers to be more cautious and spend less, reducing small business’ revenues. Second, the purchasing power of your money decreases, meaning the real value of your money is lower than it was before inflation. Finally, supplies and labor end up more expensive than they were just months before. All of these factors lead to lower profit margins for small businesses.
Inflation forces small business owners to make tough decisions about increasing prices and securing supplies. This decision making process can be problematic for long-term planning, because you might focus more on managing inflation risks rather than on your loftier business plans and goals.
How to protect your business from inflation
Although inflation does create challenges for small business owners, there are ways to avoid its worst effects. Here are four tips for protecting your business from inflation.
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1. Adapt and be nimble always
No matter when you’re reading this, it’s probably true that challenges your small business faced even six months ago are drastically different from the challenges of today. To stay afloat during any time of high inflation, you might want to consider increasing prices and saving where you can.
Try to target your price increases based on specific supply disruptions rather than raising prices across the board. This will cause less damage to relationships with customers, as they might be more understanding of your decision-making process.
Certain industries, like food and energy intensive businesses, will be more vulnerable to the effects of inflation, while other service based companies may be less at risk. Evaluate where you actually need to raise prices, and act accordingly.
While it’s important to make changes in a volatile economic environment and adjust your prices where needed, remember that rising inflation is not permanent, and staying nimble benefits you in the long run.
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2. Manage your cash flow smartly
Keeping around a large amount of cash can be damaging during inflationary times. As inflation rises, the purchasing power of your cash savings may go down. Consider investing that money to keep up with rising market prices.
It’s a good idea to consult with a financial advisor to determine which kind of investments make the most sense for your specific situation. The bottom line is: Keep the bare minimum of cash in your account to preserve the purchasing power of your money.
3. Maintain and expand your network
Supply chain disruptions, and concerns about them, are fueling the inflation fire. Securing the inventory your business needs to operate is one of the most important ways to protect your business from the harshest of inflation’s impacts.
This requires some extra effort on your part to communicate with your suppliers so you can get a sense of what products are in highest demand. This can help you anticipate future supply challenges and prepare suitably. If possible, secure a long-term contract with your suppliers to maintain stability in your inventory and prices.
It is a good idea to expand your network so that you have sourcing options when supply chain issues inevitably impact your inventory. Building out your network does require extra time and effort in the short-term, but will be extremely useful and save you time and stress in the future.
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4. Keep an eye on the future
Building out your network of suppliers, adjusting your prices and watching your cash flow carefully requires extra time and energy and will take away time you may otherwise spend planning for the future of your startup.
However it is important not to lose sight of your long-term business goals. Inflation is temporary, but your business is (hopefully) forever. Continue taking concrete actions to grow and expand your company and do not neglect your future aspirations.
While inflation is unfortunate and poses unique challenges to operating a small business, it does not have to be the end all be all for you. There are ways to avoid the worst of inflations’ consequences while looking ahead to grow in the long run.
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