Economic uncertainty impacts businesses of all sizes, but small businesses can be particularly vulnerable to the effects of a volatile economy. The high levels of inflation the nation is currently experiencing can influence both the cost of doing business and consumer behavior. As high inflation continues to be a factor, small businesses should take additional steps to safeguard their futures against risk and economic uncertainty.
Inflation happens when the value of money decreases. It results in the consumer paying more money for the same item than they would have previously. While some small amount of inflation is normal, the rate of inflation we have seen in recent years is more accelerated than is typical. Many factors can influence inflation, but regardless of the cause, the effect is felt deeply in all aspects of our economy.
Inflation has the potential to affect every part of your business, not just the bottom line.1 Inflation results in higher costs across the board — from goods and utilities to personnel expenses — and some industries, such as the restaurant industry, feel the burden more acutely. Because of this, times of inflation can make for some difficult business decisions. You might find that when experiencing the effects of inflation on small business necessities such as equipment, rent and transportation, cuts have to be made elsewhere in order to withstand.
When it’s time to look at how to deal with inflation, the first step is to explore cost saving opportunities in your business and cut any non-essential expenses. Taking time to strategically review your business expenditures may reveal more opportunities than you think.2
A good place to start is any recurring expenses, including software and other business-related subscriptions. Many subscription-based or monthly-billed business expenses are set to auto-renew annually — often at a higher cost. Review whether all your current subscriptions are still necessary, and shop where appropriate for alternate versions that come at a lower price. 2
While it may seem like laying off workers is an effective way to cut costs quickly, it often proves more costly in the long run. Hiring and training new employees can be not only an expensive process, it can also mean disruption to overall productivity and the quality of your product or service.
If you feel you have trimmed your business spending as much as possible, it might be time to adjust the price of your goods or services to keep pace with a more expensive world.
Small businesses raise prices
One way businesses survive during inflation is by raising prices. But how much do you need to raise them to be effective? You must strike the balance between remaining profitable and retaining your customers.3 Stay ahead of the curve by liaising with your suppliers to understand any upcoming rise in costs on their end. And be as transparent as possible with your customers. Communicating your own rising costs ahead of time helps your customer make room in their own budgets for your product or service. Gradual increases are typically better received than a sudden, steep rise in prices.
Businesses may take out loans
If your cash flow becomes difficult to manage during times of inflation, you may choose to take out a loan. Small business loans are lump sums of cash provided to small businesses by lenders, to be paid back with interest over time.4 One of the best resources for small business loans is the Small Business Administration (SBA), a government entity dedicated to connecting small businesses with necessary funding.
The SBA or other lending entities can help you secure short-term loans to give you greater security during difficult times. Longer term loans may also be available. When considering a small business loan, be sure to take into account the current interest rates.
Rising interest rates
One way the government may combat the impact of inflation on business is to raise interest rates. This practice is one of the most common of the many methods of disinflation. While it has shown to be effective in the past, it also can make it more difficult or more costly to borrow money. Higher interest rates mean that you will owe more money on your loan as you pay it over the time. If possible, keep an eye on interest rates and move forward with the loan you want when interest rates are relatively low.
Other ways small businesses survive inflation
If your business is feeling the pressure of inflation, you’re not alone. The Inflation Reduction Act of 2022 was written to help reduce the impact of inflation in the United States. Including various tax credits and new laws designed to gradually reduce inflation and the national budget deficit. The passing of the Inflation Reduction Act is indicative of the significant effect inflation has had on our economy.
In addition to strategically cutting costs, times of inflation should be approached with a loss-prevention mindset. Take a few extra steps to safeguard your business against hard times:
- Conduct additional safety inspections and training
- Invest in Employment Practices Liability Insurance (EPLI) in case of disgruntled employees
- Consult a professional loss prevention team
Additionally, use this time to find new ways to add value for your customers — and keep them coming back again and again. Social media is a great way to stay connected with your customers and your community without investing the big bucks. Use your social media channels to engage with current and prospective customers in a positive and authentic way that will keep your business top of mind for them.
While successfully navigating a time of inflation can be difficult, it can certainly be done. With a strategic mindset and a willingness to get scrappy, small businesses can weather the storm and even come out stronger on the other end.