How Does Inflation Affect Small Businesses?

Simply Business Inflation

We’ve all felt it. From the pang of realizing your favorite snack has become more expensive to the stress of watching gas pump numbers rise, inflation can be a burden on you — and your wallet.

Consumers are not the only ones who feel the sting — small businesses do too. When inflation rises, so do the costs of producing goods and services, and sales may slow. But what is inflation? And how does inflation affect businesses?

What is Inflation?

Inflation is the economic phenomenon of prices increasing over a given period of time. It can be as general as an increase in the overall cost of living or as specific as the pricing of individual goods and services.

Like everything else, inflation has both its upsides and downsides. The Federal Reserve has determined that an annual inflation rate of 2% is just high enough to prevent weakening the economy. If inflation is too steep, however, consumers start to buy less. Increased prices with stagnant wages mean consumers likely have less money to spend on nonessential goods and services, and that can impact your bottom line.

How to Manage Inflation as a Small Business Owner

Inflation can be a healthy part of a growing economy. But navigating the obstacles caused by skyrocketing inflation can feel like an uphill battle.

Even when times are good, a set-it-and-forget-it approach can hurt your small business. Rethinking your tactics and making regular adjustments can help your business stay on track. Here are three strategies to consider for guarding against small business inflation.

Review your business model.

A practical first step for combating small business inflation is to get a good idea of where your money is going and whether there are any areas where costs can be trimmed.

The Harvard Business Review recommends getting spending visibility. Make sure it’s broken down into categories that clearly illustrate which parts of your business the money is going to. Doing so may illuminate which business units and cost categories hit your wallet the hardest.

Think strategically. Look for ways to minimize spending that could increase your profits, or consider more business-savvy investments to protect your employees and clientele. This may mean allocating capital toward employee education or committing to a higher-quality customer experience. Doing so shows that you value your employees and customers and can help set your small business apart from competitors.

Adjust your spending.

Keep an eye on the rising costs of necessities. For example, a rise in the price of fuel, materials, or interest rates could significantly impact your operational costs, so it’s best to stay on top of those expenses.

By learning more about inflation, small business owners can negate overhead increases from the effects of inflation on small businesses. The sooner you adjust your spending to accommodate any changes from inflation, the sooner you can overcome rising costs.

Protect your profit margin.

When prices go up, that doesn’t mean your profits will automatically go up with them. Increased costs can result in tighter profit margins. So make sure to prioritize maintaining the value you offer to your customers without taking a major financial loss.

It may sound drastic, but this may involve eliminating work. For example, you could reduce the number of services you offer or limit your products. Trim down your menu. Not only does this help reduce costs, but it also may allow you and your team to provide more attention to your most profitable services.

Automating basic processes also could save you and your employees time, allowing you to focus on bigger undertakings.

Streamlining your offerings and simplifying your processes can help trim overhead costs without transferring too much inflation to your customers via price increases.

Protecting Your Business

Value is essential when running a small business. This is why Simply Business works with leading national insurers to find affordable rates for the coverages many small businesses need, such as General Liability or Workers’ Comp. Ten minutes online may be all you need to get covered and keep on with running your business.

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Small Business Growth Strategies. We’re Here to Help.

As a small business owner, it can be difficult to navigate economic upsets. But with some creativity and quick thinking, you can help guard against the impact of small business inflation and lay the groundwork for years of growth.

And we’re here to help you every step of the way. When you visit our online Resource Center, you’ll find many useful articles, tools, and tips. Here are just a few that provide helpful information for small businesses like yours:

Kristin Vegh

After several years of working in insurance while also freelance writing, I’ve finally found where the two interests intersect. I’m a writer with Simply Business with an insurance processing background and a love of research.

Kristin writes on a number of topics such as small business trends, license reciprocity, and BOP insurance.