Inflation. It’s a word that makes the hairs on the backs of economists’ necks bristle; that sends shivers up the spines of politicians and governments everywhere.
But how does inflation affect a business? More importantly, what does inflation mean for your small business? Let’s find out.
Below, we discuss what inflation is, how inflation impacts businesses – both good and bad – and offer our top tips for how you can manage inflation in 2023.
Inflation, at its most basic, is when prices – for goods, services, rents, and more – go up.
When things cost more, your ability to buy things (or, as the economists prefer to say, your purchasing power) decreases.
In short? Your money doesn’t go as far.
Inflation is less the exception than the rule – in fact, it pretty much defines the history of our economy.
That $10 bill in your pocket, today, might get you a gas station sandwich and a soda (if you’re lucky). But in 1960, $10 would’ve gone a lot further. (In fact, it’s worth around $100 in today’s cash!)
Why? Because of inflation. So how does inflation affect businesses?
Naturally, the idea of inflation is a scary one for businesses – especially smaller ones still finding their feet.
Not only can inflation mean fewer sales (as your customers grapple with the increased costs of living), it can also up your overheads and employee costs – thereby limiting your profits. Plus, some businesses – those that sell non-essential products and services, for instance – will be more affected by inflation than others.
But don’t plunge into despair. Because how inflation impacts businesses isn’t all bad – and it can, in fact, bear a bunch of beneficial fruit for small businesses.
Let’s take a look at both sides of the coin.
Inflation: The Bad
Inflation can negatively impact small businesses in several ways, including:
- Decreased sales: as people’s purchasing power declines, so too may their spending – meaning, potentially, fewer sales for your business.
- Higher costs: with your own business’ dollar not going as far, your costs – for inventory, rent on your store, and more – will go up.
- Product shortages and supply chain disruption: with multiple businesses trying to cut costs by competing for the cheapest materials, shortages – and associated supply chain issues – will abound.
- Increased cost of borrowing: the pressures of inflation often lead the Federal Reserve to raise interest rates, making it more expensive to borrow money.
- Higher employee costs: employees, facing their own plummeting purchasing power, may demand higher wages to keep up – giving you a difficult decision to make.
Inflation: The Good
Inflation isn’t without a positive spin for small businesses, though – and there’s no shortage of benefits. These include:
- Price increases boosting profits: by pushing up your prices in line with inflation, you can take more money – for the same products and services.
- Employee retention: with inflation creating more uncertainty in the job market, it may help you hang onto your existing employees.
- Opportunities to find better suppliers: inflation can provide the impetus you need to reevaluate your relationships with suppliers, and locate ones that offer better value in an inflated economic environment.
- Makes old debt more affordable: with inflation eroding money’s value, new debt becomes more expensive – making older debt much more desirable.
Regardless of whether you see the inflationary glass as half full or half empty, one thing’s for sure – your small business needs to be able to manage it.
When inflation strikes, the cost of everything goes up. Meaning your business, too, will have to charge more to stay in line with the market.
That’s not to say you should take a gung ho approach to raising your prices. Competitor analysis here is vital, so do your research to find out what rival companies are charging for similar products.
Be sure, too, to keep your customers in the loop as to why you’re raising your prices: so they know it’s to stay competitive, rather than greed-motivated. Most people know what inflation is, and the demands it places on small businesses – and they’ll expect rate rises. So, if you’re transparent about your price hikes, they’ll usually understand.
Need a hand setting the right rates for your services? Check out Website Builder Expert’s guide to how to price a product for our top tips.
As we’ve discussed, inflation means higher costs – and that includes your overheads. The costs of rent (on your bricks and mortar premises, if you have one) may go up; likewise the price of purchasing your inventory wholesale.
Solely ecommerce businesses aren’t immune, either. Shipping costs will go up, and ecommerce platforms and payment providers may increase their fees. To respond, you’ll need to cut your overheads. But how?
To start, draw up a detailed list of your operating costs, and how much they are. Then, analyze where you could cut back by switching to an alternative provider. However, you’ll still need to understand the pros and cons of that alternative vis a vis your current provider, so ensure to figure these (non cost-related) factors into your decision.
Once the reward of cutting costs outweighs the risk of switching provider, service, or supplier, make the change to reduce your overheads.
While it may seem counter-productive at first (growing in an inflationary environment? Huh?), expanding your business can actually be an effective way of easing the pain of inflation.
Essentially, this strategy revolves around focusing on growth – of your client base, your staff size, your ambitions, and your revenue – to weather the storm of inflation. The goal? To generate enough profits – whether that’s by selling internationally, or unlocking the power of earning money through social media – to remain one step ahead of inflation. And your competition!
How can you grow your business? Well, that’s a topic that deserves its own article. Fortunately, we’ve written it – so check out how to grow your business online, today.
Any time is a good time to reevaluate how you do business (and you should always be iterating and optimizing how you do things to stay ahead of the game).
But reevaluating business practices is never more important than during inflation.
By running a critical lens over how your small business operates, you can engineer efficiency and productivity, while cutting out the non-essential processes hogging your reserves of time, effort, and cash.
Some of the ways you can reevaluate your business’ practices include:
- Analyzing your profit margins: by identifying and moving away from low-profit items, you’ll have more time – and resources – to focus on the stock that’s making you the most money.
- Getting online: might your brick and mortar store be costing you more money than it’s bringing in? With ecommerce so firmly established now, and the power of the high street declining, inflation means it might be time to make the switch – and become an online-only business.
- Diversify your revenue streams: are you selling on social media? Have you tried content marketing as a way of building your brand – or email marketing to engage your audience?
Inflation and the supply chain have a kind of “knock-on” effect on each other. With inflation comes higher supply chain costs – wages, energy, raw materials, transportation – which, in turn, causes more inflation.
Of course, if your business has been trading for the last couple of years (through the COVID-19 pandemic, the war in Ukraine, and ongoing fossil fuel shortages), you’ll be no stranger to supply chain woes.
Yet with these supply chain issues – in times of inflation, especially – comes a good opportunity to reassess your supply chain.
- Auditing your suppliers: are they reliable? Are there more affordable alternatives, or ones that offer a shorter lead time? Are you over-reliant on a single supplier, thus limiting your options at the peak of an inflationary cycle?
- Assessing your inventory: some products (particularly those that are hazardous, heavy, or perishable) are difficult to store, and can pose risks to your supply chain’s efficiency. If your business model or profits don’t rely on them, you might want to consider pivoting to a different type of product.
Once you have a better understanding of the risks your supply chain might pose in times of inflation, you can take steps to mitigate against them.
These steps include:
- Locating alternative suppliers (if you’re in the dropshipping business, we have an article – how to find dropshipping suppliers – to help you do just that).
- Stockpiling goods that are less intensive to store (i.e. smaller items), but that may be harder to source or import from elsewhere amidst an inflated economy.
- Reviewing your inventory levels to help you stay ahead of the game.
At the time of writing, inflation in the US sits at around 8.5%. (And, by some measures, we’ve already entered a recession.)
So is inflation something small businesses should be worrying about?
Yes – and no. As we’ve seen, inflation offers both positives and negatives for small businesses. And brings, along with the worry of higher costs and fewer sales, the upsides of employee retention (and the affordability of old debt).
But what’s more is that – as the strategies we’ve outlined above demonstrate – it is possible to safeguard your small business against inflation. By evaluating what you sell, where you procure it from, and how you sell it, you can cut costs and drive up profits – inflation or not!