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Rising prices are making headlines and forcing both business owners and everyday employees to make difficult decisions. Inflation rose to 7.5% in January 2022, the highest rate in 40 years. Although everyone has felt the effects of inflation (especially drivers) in recent months, small business owners have often felt the impact of inflation.
What is inflation?
Inflation occurs when demand exceeds supply in an economy, causing prices to rise in various sectors. In recent months, inventory, supply, and labor costs have all been problematic, making it difficult for small businesses in almost every area of the economy. According to the latest data from the Bureau of Labor Statistics, more than half of small businesses have had to raise their prices since the beginning of 2022, the highest percentage since 1974.
Related: Inflation is a risk for your business, but you don’t have to spell doom
How Inflation Affects Small Businesses
Inflation creates three major problems for small business owners. First, it makes consumers more cautious and costs less, reducing small business revenue. Second, the purchasing power of your money decreases, meaning that the actual value of your money is lower than before inflation. Finally, supply and labor are more expensive than they were just months ago. All of these factors lead to lower profit margins for small businesses.
Inflation forces small business owners to make tough decisions about price increases and securing supplies. This decision-making process can be problematic for long-term planning, as you may be focusing more on managing inflation risk rather than your higher business plans and goals.
How to protect your business from inflation
While inflation poses a challenge for small business owners, there are ways to avoid its worst effects. Here are four tips to help you protect your business from inflation.
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1. Adapt and always be smart
No matter when you’re reading this, it’s probably true that the challenges your small business faced even six months ago are completely different from today’s challenges. To stay afloat at any time of high inflation, you may want to consider raising prices and saving wherever you can.
Instead of raising prices across the board, try to target your price increases based on specific supply constraints. This will cause less damage to the relationship with the customers, as they may be more understanding about your decision making process.
Some industries, such as food and energy intensive business, 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 the price and act accordingly.
While it is important to adapt to a volatile economic environment and adjust your prices as needed, keep in mind that rising inflation is not sustainable and will benefit you in the long run.
Related: Keep 3 inflation-proof ETFs in your portfolio
2. Smartly manage your cash flow
Holding large amounts of cash at the time of inflation can be detrimental. As inflation rises, your purchasing power of cash savings may decrease. Consider investing that money to keep up with rising market prices.
It is a good idea to consult with a financial advisor to determine which type of investment is most meaningful for your particular situation. The bottom line is: keep a minimum of cash in your account to save your purchasing power.
3. Maintain and expand your network
Supply chain disruptions, and concerns about them, are fueling the fires of inflation. Protecting the inventory you need to run your business is one of the most important ways to protect your business from the worst effects of inflation.
This requires some extra effort on your part to communicate with your suppliers so that you understand which products have the highest demand. It can help you anticipate future delivery challenges and prepare appropriately. If possible, secure a long-term agreement with your supplier to maintain stability in your inventory and price.
It is a good idea to expand your network so that you have sourcing options when supply chain issues inevitably affect your inventory. Building your network requires extra time and effort in the short term, but it will be highly effective and save you time and stress in the future.
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4. Look to the future
It takes extra time and energy to network your suppliers, adjust your prices, and carefully monitor your cash flow, and you can spend time planning for the future of your startup otherwise.
However, it is important not to lose sight of your long-term business goals. Inflation is temporary, but your business (hopefully) is forever. Continue to take strong steps to grow and expand your company and do not neglect your future aspirations.
While inflation is unfortunate and poses a unique challenge to running a small business, it doesn’t have to be the end of everything for you. There are ways to avoid the worst consequences of inflation while waiting for long-term growth.
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