Worried about inflation? You’re not alone. According to a recent survey, the number of small business owners reporting inflation as their top concern reached its highest level in over forty years.
The last time inflation was this bad, Ronald Reagan was in the White House, and big hair and shoulder pads were in style. A lot has changed, but the pain you may be feeling is the same.
So what are inflationary pressures?
Inflationary triggers are complex, but many analysts see this as a classic case of too much money chasing too few goods. Now the Fed has been raising interest rates to cool the economy.
How does raising interest rates help inflation? When the benchmark rate goes up, it makes getting any kind of loan cost more. Increasing costs helps improve supply by getting demand down. The Fed’s efforts appear to be working, but inflation remains high. And in the words of one Central Banker, there’s still a long way to go.
As if the pandemic and labor disruptions weren’t enough, small businesses are facing issues related to inflation not seen in decades. And high labor, energy, and material costs are hammering the bottom line. According to a SCORE survey, a majority of surveyed small business owners have seen their profits decline in 2022. Ouch!
For many of you, this may be your first time contending with runaway inflation. But don’t panic, we’ve got you! The following 12 tips can help you combat rising inflation and navigate these turbulent times.
Last year, some policymakers held out hope that inflation would pass quickly. But for most of 2022, it lingered at over 8% — a forty-year high. Yes, the pace finally appears to be cooling off, but taming run-away inflation takes time. And the Fed cautions that more interest rate hikes may be necessary to achieve its target goal of 2% annual inflation.
As much as it may hurt to face inflation, don’t try to wait it out. Now is the time to consider changes that will help you weather this storm.
It’s tempting to raise prices in the face of shrinking profits, but to compete with the bigger companies, small business prices typically need to be competitive. Before you figure out how to adjust prices for inflation, consider these proactive strategies.
Analyze your profit margins. As prices for materials, labor, and rent increase, it's important to monitor how those changes impact the products you sell. Review profit margins quarterly. Early awareness about where you can increase profit margins will likely help you save money and give you time to adjust to cash flow issues.
Assess your expenses and look for ways and opportunities to save. Take a close look at operating expenses — raw materials, wages, rent, software, and service contracts. You may be able to identify areas where you can trim the fat.
Are there any products or services that aren’t being used? Consider cutting those immediately. For essential contracts, think about buying in bulk, negotiating a better deal, or exploring less expensive alternatives.
One of the surest ways for small business owners to beat inflation is to streamline operations and increase productivity. Start by focusing on your core competencies and then consider outsourcing the rest.
Next, look for ways to improve efficiency and productivity. Is there software that can help automate repetitive tasks like scheduling, billing, or collecting payments? Consider investing in technology and automation to increase employee productivity, reduce costs, improve services, and streamline operations.
Rising costs are causing cash flow problems for over one-third of small business owners who took part in a recent SCORE survey. And owners who don't carefully estimate their cash flow may be placing their business at serious risk.
To get started, consider creating a cash flow forecast. A reliable forecast includes three key elements:
If you’re new to financial planning, check out these free templates from SCORE, a nonprofit that supports small businesses like yours.
Another key to optimizing cash flow is to invoice quickly and clearly. Here are a few tips that can speed up the process:
If cash flow is a persistent challenge, consider opening a business line of credit. Unlike traditional loans, a line of credit provides access to a fixed amount, but you pay interest only on the amount you withdraw. This can be a cost-effective way to prepare for unexpected expenses. Yes, interest rates are high, but with more hikes expected from the Fed, by locking in a rate now, you may avoid higher rates later.
Of course, one of the best ways to address cash flow issues is to get paid more and faster. Here are some strategies to consider that might help:
Now is a great time to reorganize debt and borrow wisely. The U.S. economy appears to be slowing down, but forecasters predict more rate hikes in the coming year. If possible, pay down variable-rate loans now to avoid accumulating interest. If that’s beyond your reach, consider contacting your lenders about consolidation options with a fixed-rate loan so that your interest doesn’t rise with one of the next Fed rate hikes.
A recent survey found that nearly half of all surveyed small businesses have been impacted by supply chain issues. Retailers have been hit hardest, with over 60 percent of surveyed retailers reporting an inability to properly stock shelves or obtain parts.
Inflationary forces are complex and many. But one of the most important relates to supply and demand. When American consumers emerged from the lockdown, demand for products outpaced supply.
Ongoing disruptions in manufacturing and shipping added insult to injury. And even when business owners can obtain limited supplies, they’re often paying higher prices for them.
One proactive strategy for combating supply chain disruption is to diversify your vendors.
First, create a checklist for vetting new vendors, including lead time, pricing, quality, and even a facility tour, if you’re able. Once you find strong partners, treat them like gold. Build trust and loyalty with reliable communication and payments. These relationships may be your lifeline in the coming year.
Consider stocking up on inventory with low holding costs before prices increase. You also may want to renegotiate contracts or prepay for long-term services at current rates.
So you’ve done all you can to tighten your belt and supercharge productivity, but your profit margins are still too low. Now what?
Whatever you do, resist the urge to be a martyr. Customers understand you’re battling historic inflation. And some price increases are expected. According to a recent National Federation of Independent Business (NFIB) report, half of all business owners are raising prices.
While charging more may be the new normal, it’s important to proceed with caution. Consider raising prices in modest increments to avoid alienating customers. And be sure to share news ahead of time with customers about price increases.
With clear communication and a commitment to quality, your customers may welcome reasonable price increases as a way of showing support.
As a small business owner, you may have a strategic advantage over big-box stores. Authentic relationships with your customers. Reward them with occasional discounts or exclusive access to events.
And don’t be shy about encouraging happy customers to share your story on social media or write a review. On a recent vacation, a small business owner sent me a thank you note and asked if I’d write a review. I was happy to do so! It’s been a rough few years for small business owners, and now more than ever, customers may be willing to go the extra mile to help you succeed.
Competitive pricing is a great way to win over new customers. According to a recent poll by Morning Consult, over 70 percent of consumers said they will look for less expensive alternatives this coming holiday.
And with inflation at a four-decade high, even affluent consumers are expected to trade down on everything from groceries to luxury goods. Consider offering discounts to new customers to capitalize on this trend.
Employee retention is another key aspect of your inflation survival plan.
Your employees are feeling the pinch too. Adjusted for inflation, the real value of their wages is on the decline. A recent Payscale survey found that over 40 percent of companies are losing employees due to pay.
With labor shortages at historic highs, it’s more important than ever to understand what makes your employees happy. The easiest way to find out is to ask! Don’t delay conversations about how inflation is impacting their personal lives.
If you can't afford giving them a pay raise, there may be other ways to enhance job satisfaction. Find out what your employees want in terms of perks, benefits, career growth opportunities, and scheduling.
Working from home can mean big savings in commuting costs. And for many workers like myself, flexible hours can greatly increase job satisfaction. You may be surprised by what you learn!
Now that inflation may finally be turning a corner, economists are taking bets on a looming recession. Yikes!
One thing is certain — nothing is forever. And with these strategies, your business can survive, and even thrive, regardless of whatever storm lies ahead.
One of the best ways to protect your business in uncertain times is with business insurance. By being prepared, you can reduce the potential impact of a covered event during times of continued inflation or recession that may already be having an impact on your bottom line.
Here at Simply Business, we’re an online insurance platform that specializes in helping small businesses find affordable insurance coverage — all in just minutes. It's a small investment for the protection we can provide when and if the unexpected happens.
The Simply Business® team works with leading national carriers that specialize in providing coverage for small businesses like yours. And as a result, we often can offer multiple quotes for the same coverage. Usually, the only difference is price.
With our competitive advantage, we can be surprisingly affordable with general liability policies as low as $22.13/mo.* And in inflationary times like these, every penny counts!
Got questions? We can help there, too. Our licensed insurance pros can get you the answers you’re looking for and get you covered — often on the same call. You can reach them at 844-654-7272, Monday-Friday, 8 a.m.-8 p.m. (ET).
If you see a policy you like, you can click to buy it. It really is that simple!
*Monthly payment calculations (i) do not include initial premium down payment and (ii) may vary by state, insurance provider, and nature of your business. Averages based on April-June 2022 data of 10% of our total policies sold.
Born and raised in the fishing port of Gloucester, MA, I grew up listening to the sea stories of local fishermen. My first job was “chum girl” on my dad’s tuna boat, where I spent my formative years covered in fish guts. Since then, I’ve worked as a researcher, blogger, and writer for documentary films. When not at work, you can find me surfing the cold waters of the North Atlantic or searching for warmer waves around the world.
Courtney writes on a number of topics such as risk assessment, starting a small business, and financial resources.
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
*Harborway Insurance policies are underwritten by Spinnaker Insurance Company and reinsured by Munich Re, an A+ (Superior) rated insurance carrier by AM Best. Harborway Insurance is a brand name of Harborway Insurance Agency, LLC, a licensed insurance producer in all 50 states and the District of Columbia. California license #6004217.