How to Protect Your Small Business Against Inflation
The post-pandemic transition period has been tricky for small businesses that have survived COVID-19.
Inflation rates have reached a multi-decade-high of 8.6%. The consumer price index shows everything, including labor and goods, is rising. Small and mid-sized businesses with limited resources will likely take the most significant hit.
You should take steps to ensure that your small business is inflation-ready.
We'll show you how to protect your company against inflation using strategies designed to prepare you for rapidly changing market conditions.
What is inflation exactly?
Inflation is a sudden rise in the price of goods or services over a short time.
The majority of inflationary periods are:
Start by addressing the supply-demand issues resulting from shortages
Suppliers and other businesses raising prices
Increasing costs make it more difficult for companies to keep their bottom line
A company's purchasing power will decrease as well as its sales volumes, profit margins, and growth initiatives. In addition, many small-business owners are concerned about rising inflation because personal accounts fund most.
Inflation rates are on the rise
Inflation is not just a result of climate change. It also includes rising energy prices, persistent supply chain problems, and continuing labor shortages.
Take, for example:
Gas price increases lead to higher shipping, distribution, and inventory delivery costs across all businesses
Many of the global supply chain disruptions initially caused by pandemic shutdowns are still unresolved, leading to increased manufacturing backlogs and fulfillment delays
Truck driver shortages worsen broader supply chain problems, leaving many businesses severely understocked
Despite ongoing labor shortages, some businesses are forced to reduce their hours and operations. However, many employees demand higher wages to keep up with rising living costs
Some companies can absorb these costs, but others must have a plan to protect against inflation.
Five strategies your business can employ to manage inflation
Different business owners can be affected by inflation differently and at other times. Even if you are not facing inflation, it is vital to learn how to manage your business to prevent rising costs and shortages.
1. Raise your prices
Although price increases are unpopular with customers, they're often necessary to combat inflation--especially for businesses directly affected by rising labor, food, or gas costs (like food and beverage companies, for example).
If your margins are dwindling, you can use your competitors' prices as a starting point or guideline for increasing your prices.
Inflation won't immediately impact your business, but you can still stay competitive and improve your market position.
2. Evaluate the supply chain risk
While you may not be in a position to stop rising supply costs, there are steps you can take to reduce them and preserve your small business's supply chains over the long term.
Assess your supply chain for potential risky elements such as single or long-lead suppliers, perishables (for example), and products that make up a large portion of your cost-of-goods–sold (COGS).
Next, you can strengthen your supply chain with:
Diversifying your provider network and sourcing more domestic suppliers
Adjusting your safety stock levels
A store that stocks the best-sellers or critical goods with low holding costs is possible
You might also consider working with suppliers to save money on inflation-proof fixed rates.
3. Create financial forecasts for different scenarios
You can plan how rising costs and shortages could impact you by running through different what-if scenarios. First, identify the current inflation trends in your industry. Next, create financial forecasts to assess their impact on your company.
For example, you might forecast about:
Rising wages by a fixed percentage
Supply and raw material prices rise by twofold
Revenue delays due to disruptions in supply chains of a certain length
You can prepare for a better financial outcome by creating forecasts that consider such changes.
Be sure to assess how cash flow will be affected by each scenario to determine the best course of action and how to mitigate financial distress should it occur.
4. Evaluate your product and revenue mix
It will be easier to manage costs and supply by limiting the scope of your offerings.
As a restaurant manager, you can revise your menu to reduce the need for expensive or difficult-to-find food items. You can increase your chances of maintaining profitability in inflationary times by streamlining your product and revenue mix.
5. Reduce your expenses
You might be able to serve your customers better if you reduce your business costs than increasing your prices.
You might try:
If cash flow is not an issue, maximize early payment discounts
Canceling subscriptions and technology that is not being used or renegotiating old insurance or internet contracts.
Outsourcing activities not related to core business activities
For example, hiring full-time, in-house employees increases salaries, deductions, benefits, and training costs. On the other hand, you can save time and combat rising labor costs by outsourcing your bookkeeping or accounting.
Proper bookkeeping can help protect your business from inflation
You can use many strategies to manage and prepare for post-pandemic inflation. However, the more information you have about your company's financial health, the easier it will be to plan and adapt to rising costs.
Up-to-date, accurate books can help you improve your financial transparency.
Find out which products or services have the best performance or highest profit margins
Decide whether, when, and how high to raise prices. Also, identify areas where you can reduce costs
You can monitor which costs are rising so that you can make a financial forecast to plan ahead
Need a professional, customized bookkeeping solution that will make it easier to see how to protect your business against inflation? Basis 365 can help.
