How Inflation Can Affect Small Business Owners

While economic experts across the country may disagree on how bad inflation really is at the moment, all of them agree that the current economic environment is rough and only going to get worse, at least in the short term. Some say that year over year inflation sits somewhere around 8%. Others suggest the number is a little bit higher—and others still say that it’s quite a bit worse than that. What we do know is the economy is in a state of flux, with inflation numbers reaching record levels not seen for 40 years and small businesses having to find their way through this new landscape.

It’s not surprising that inflation has been hitting small businesses hard over the past year. A recent study by MetLife and U.S Chamber of Commerce showed 85% expressing concern for impact on their business, with 1 out 3 citing it as one major problem they are facing right now in running operations.

The reality is that inflation is always happening, so small-business owners need to be prepared for it. It’s important to understand how inflation affects your business and to come up with solutions to manage it.

What Is Inflation?

Inflation measures the progressive increase in the price of goods and services over a set period of time. As the cost of products and services goes up, consumers start buying less.

The Federal Reserve actually aims for an inflation rate of 2% per year because if inflation is too low, the economy can become weak and fail to grow. However, elevated levels of cash flowing through an economy hurt consumers by making prices rise while also hurting businesses that rely on profits rather than volume for their success.

How Inflation Affects Small Businesses

Higher costs – A recent Business survey found that 92% of small-business owners have dealt with increasing expenses since the pandemic started.

Rising prices – Because running a business is more costly, over 80% of small-business owners have increased their prices to counter inflation. Of course, you risk losing customers when you raise the price on products.

Cutting overhead expenses – Many businesses have had to reduce inventory, cut marketing spend or find other ways of saving cash during tough economic times.

Tighter profit margins – Rising costs often result in tighter profit margins. This can make it difficult for businesses to stay profitable as they are spending more money on costs and production.

Tips On Dealing with Inflation

Inflation will never truly end because the value of what you receive is constantly changing. However, the current inflation we’re dealing with will level off at some point, and some sense of normalcy will return. But until that happens, small-business owners need to find a way to manage the impact of inflation.

Customer ReactivationOnce you get a customer, the last thing you can afford to do (especially in a tight economy like this) is ignore or forget about them. In-house marketing is a great way to contact past customers and offer them new products or services. You can also use email campaigns but be careful not just send anything. It’s important you’re genuine so they’ll know what makes your company special. Your existing customer base will be a vital part of helping you get through this economic downturn.

Joint VenturesThere are many ways to get your business noticed and draw in potential customers, but one of the most overlooked methods is partnering with other local businesses. Pooling resources together can create an unbeatable marketing campaign that would be difficult for any single company or individual entrepreneur without help from others.

Streamline Services –When inflation rates rise drastically having an extensive product line can be more dangerous than good. It may make you seem like someone who doesn’t care about your customers’ needs or wants which could lead them away from investing in your company’s future success.

Protect Funds – Any money you save will improve your cash flow. But saving money isn’t enough on its own—you should also focus on investing your money. You need a way to make your money work for you, and that means multiplying it inside of business as well outside. It’s important not just keep up with inflation or even exceed it, your goal should be more along the lines of outperforming this harmful trend.

Grow Your Bottom LineCustomer lifetime value, overall order value and recurring payments (as well as upsells, downsells and cross-sells) are all a huge factor in making it through inflation like this. The more a small business can grow their back end, the more resilient they are going to be.

When Will High Inflation End?

Inflation doesn’t stop, it’s a reality you’re constantly dealing with. The best thing to do in this situation is make choices about how your business will be managed and what those effects may mean for the future of yours or others’ investments. Balancing financial constraints with opportunity cost appears challenging but necessary for any business looking at long term growth. The importance here is to always keep your customers happy and give them a reason not only make purchases from you, but also come back for more. You can maximize your profits by staying small and cutting expenses where possible. You could also focus on investing in the growth of your business, but it all comes down to what you prioritize as an entrepreneur.