June 15, 2022
Reading time: 3 mins
Inflation is hitting consumers hard. The latest release from the Bureau of Labor Statistics shows prices climbing 8.6% over the last twelve months through May, the largest price increase since 1981.
At the same time, we shouldn’t forget that inflation also affects small businesses. In a recent poll conducted by Ipsos, 85% of small business owners expressed concern about the impact of inflation on their business, and 33% ranked inflation as their top concern. In this article, we look at inflation from the perspective of a small business owner. Our goal is to provide you with five strategies to help protect your business from this current bout of inflation.
What is Inflation?
Inflation is an increase in the prices of goods and services over a period of time, usually a year. To calculate inflation, economists compare the prices of goods and services in the current year to those of the same goods and services in the previous year.
Inflation measures can be broad or narrow. The media typically quotes broad measures of inflation like the Consumer Price Index (CPI), which includes prices for various goods and services. However, price indices for specific categories of goods and services (like raw materials) also exist and can be more useful to business owners.
How inflation affects small businesses
Inflation can create many difficulties for businesses. Here are some of them:
- Higher input costs: The products and services you need to run your business are becoming more expensive. According to a Business.org survey, 92% of small-business owners surveyed have dealt with rising costs since the beginning of the pandemic
- Higher borrowing costs: The longer inflation persists, the more likely borrowing costs will rise. Banks and other financial institutions will start charging your business a higher inflation premium, raising interest rates to offset the effects of higher prices on their loan returns
- Higher employee costs: When prices jump, many businesses ramp up production by hiring more workers to meet the increased demand. Workers may leave their current employer for a company offering higher wages. Businesses that want to retain their employees will have to raise their wages
- Loss of customers: When prices rise, consumers often cut back on their purchases to stay within budget. You may lose customers even if you don’t raise your prices since other goods and services are eating more into budgets. Customers might buy less from you simply because they’re spending more than they used to on other goods and services.
- Lower profits: Ultimately, all of the costs described above result in lower profits for your business
Strategies to combat inflation
- Track your costs closely: Make sure you spend most of your money on essentials. Review your production costs closely and cut back on items that don’t contribute to your bottom line. In particular, see if there are any overhead costs you can eliminate without lowering your production
- Diversify: If raising prices will cause you to lose customers and reduce your profits, consider diversifying your offerings. You can do this by offering products with higher margins or targeting a segment of customers that is less sensitive to price changes
- Watch your competitors: This could be an opportunity to gain new customers, not just temporarily. By keeping your prices the same while your competitors raise their prices, customers are more likely to stick with you in the long run. Your profits will most likely decrease for some time, but as costs normalize, the increased demand from your new customers could make your profits higher than they were previously
- Talk to your suppliers/providers: Ask why they are raising their prices and whether it’s permanent or temporary. Try to be understanding of their situation and show patience. Without being pushy, ask if there’s something you can do to get lower prices or better payment terms (you never know, they might cut you a special deal!) Your partners will be more inclined to help you in the future if you stay loyal
- Take out a loan: One way you can continue to grow your business is by taking out a loan. Interest rates are still low relative to inflation, so you will most likely pay back the loan with cheaper money than you borrowed. Just be sure you have a place to invest your loan proceeds
One last tip
If you need help dealing with inflation - or any other problems you might be facing - reach out to email@example.com and tell us about your business. You can schedule a (free) call with a Hansa expert at your earliest convenience.