How can small businesses deal with rising inflation costs?

April 7, 2022

The backbone of America’s economy is small businesses. According to the U.S. Small Business Administration (USSA), 99.7% of all US businesses are small, employ half the private sector employees, and generate $2 trillion annually in revenue. Despite their importance in the overall economy, small businesses can be particularly vulnerable to inflation and its impact on prices and costs. (Merchant Cash Advance Same Day Funding)

The basic inflation rise means that small businesses will pay more. The raw materials that you use to produce your products will cost more. Your payroll will also be subject to rising costs due to the higher cost of labor. 

Small businesses are less able to cope with inflationary pressures. Even though every company and industry has its unique dynamics, startups face a difficult fight against inflation. Startups often use their agile nature to challenge established companies on price. They might not be as powerful in pricing as their competitors, who are usually larger companies with better-known brands. 

What is Inflation? 

Inflation refers to a rise in prices for goods and services over some time. Many factors can cause inflation, including increased government spending, an increase in the money supply, and an increase in taxes. Inflation causes a decrease in the purchasing power of money. In other words, people will need to spend more money to purchase the same goods and services. Businesses may have difficulty planning for the future if they don’t know how much inflation will occur. There has been a lot of inflation in recent years. 

Which types of businesses are more vulnerable to inflation? 

Understanding which businesses are most susceptible to inflation is the first step. Businesses that depend on imported or raw materials are especially at risk. This is because fluctuations in commodity prices or currency values can lead to significant increases in cost. Service-based businesses can also be vulnerable as they may not have the ability to pass on increased costs to customers and often don’t have control over their prices. 

These types of businesses are the most susceptible to inflation:

  • Purchase large quantities of inputs from external sources. 
  • Have low margins of profit or 
  • Fixed costs account for a large percentage of the total cost. 

International imports and exports are particularly vulnerable to inflation. They are subject to fluctuations in foreign exchange rates. Businesses that offer services, rather than goods, are also vulnerable to inflation. This is because labor is a key input and prices for services are more flexible than product prices. 

Different types of businesses are more susceptible to inflation than others. Businesses that sell luxury goods, or products that aren’t essential, are more susceptible to inflation than those that sell essential products like food. Small businesses are also more susceptible to inflation than larger companies. Because small businesses don’t have the same bargaining power regarding prices, this is why they are more vulnerable to inflation. 

Inflation & the Current Economy 

Small businesses need to be proactive about addressing inflation in today’s economy. They can take steps to safeguard their business from rising costs and help ensure that it is strong and viable in the face of inflation. 

The Small Business Administration offers a variety of useful resources for small business owners looking to learn more about how to manage rising inflation. For more advice specific to your business, you can always talk to your banker or accountant. 

Small businesses must be prepared for any type of challenge in today’s economy. Rising inflation is one example. Small businesses can overcome these challenges and thrive despite rising costs if they have the right strategies and tools. 

How small businesses can deal with rising inflation costs 

A small business can manage rising inflation in many ways. 

  1. Price increases: This is one way to pass some of the higher costs onto customers. This can be problematic if there is intense competition or if customers are price-sensitive, but it can work if you do it in a strategic and controlled manner.
  2. Reduce Costs: Another approach to lower input prices is to cut costs. You might reduce staff, negotiate contracts with suppliers or find more efficient ways of producing goods and services.
  3.  Assess Profit Margin: Businesses need to evaluate their profit margins to ensure they are making enough money to cover higher costs. Businesses may need to raise prices or cut costs if profits are low.
  4. Do a Risk Assessment: Companies should conduct a risk assessment of the supply chain to identify potential risks that could lead to higher costs. You might need to assess the stability of key suppliers or the impact of currency fluctuations on market trends.
  5. To help you deal with rising costs, businesses can seek out assistance from organizations such as the Small Business Administration (SBA). SBA provides a range of services and programs that help businesses grow and manage their finances.
  6. Invest in hedging strategies. Hedging strategies are a way to protect your business from inflation. They lock in the current price of goods and services, which can help you avoid losing money. This can help businesses keep their profits high during inflation.
  7. Diversify your revenue streams: Businesses should explore other revenue streams during times of inflation. This could mean expanding into new markets, new products, or finding new ways of monetizing existing products and/or services.
  8. Stockpile goods: A business can stockpile goods to reduce the risk of prices rising. If the business sells perishable products, this may prove difficult.
  9. You can become more efficient by automating or outsourcing work. 

Small businesses must be proactive and strategic in making decisions to succeed in today’s economy. Small businesses can manage rising inflation costs by following these tips. 

These Strategies Can Help Small Businesses Survive Inflation 

Although you might be feeling the effects of inflation right now, your small business may still be affected. Each business is affected differently by inflation. 

These are some of the steps you can take to stop inflation from becoming a problem. 

Your pricing power can be increased. 

Inflation will soon force every company to pass on the increased costs to its customers. Even though inflation won’t affect you long-term, increasing your pricing power will increase your market position. Here are some ways to increase your pricing power. 

  • Identify what makes you stand out from your competitors and then focus on that product, marketing message, or service. 
  • Your offering can be made more unique by bundling, de-bundling, or branding. 
  • Your products and services should be targeted at clients who are more price sensitive. 
  • You can reduce the length of your contract or include variable pricing mechanisms such as commodities fees in your contracts. 
  • Invest in customer service by increasing your staff, training, and improving your sales process. 
  • To create a single-stop shop, integrate your services vertically. 
  • Offer free services, subscriptions, and warranties 

You can use scenario analysis to predict how inflation will affect your business. 

Recently, we wrote about scenario analysis as a way to predict the effect of various events on cash flows. The same approach can be used to predict inflation. What happens to your business if? 

 

  • The wages were expected to increase 25-50 percent 
  • Supply chain disruptions can cause 25% to more revenue delays or inventory build-ups. 

 

The following questions must be answered when conducting a scenario analysis: 

  • What if I can’t pay all my expenses? 
  • What will you do in each situation? 
  • What preventative actions can I take right now? 
  • What metrics are best for leading indicators? 

Get a Loan

Businesses need cash access in times of inflation to keep their liquidity and pay higher costs. A small-business loan may be able to bridge the gap between income and expenses. Inflationary conditions and low-interest rates mean that your loan will be repaid using less money than you borrowed. You should make sure you use your loan proceeds. Inflationary times are a good time to consider: 

  • Equipment and property 
  • Rare inventory that is bulk-discounted 

This is a great time to get a loan. You will likely repay your loan faster than you borrowed because of the low-interest rates and high inflation risk. Make sure that you have somewhere to deposit your loan proceeds during inflationary times. 

  • Marketing that distinguishes your brand (to increase pricing power) 
  • Machinery and property 
  • Inventory that is rare or bulk-discounted 

Small businesses can be affected by inflation, regardless of what type they are and the products or goods they supply. This article will help you understand how to make sure your small business survives inflation. (Merchant Cash Advance Same Day Funding)