7 Proven Ways to Manage the Impact of Inflation on Small Businesses

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Nearly a quarter of small business owners say their greatest concern is inflation, according to the latest National Federation of Independent Business (NFIB). With the current inflation rate sitting at 7.5 percent—the highest it’s been since 1982—per the Bureau of Labor Statistics (BLS), it’s no wonder businesses are feeling the strain. What’s behind this shift and how can you protect your small business from inflation? Let’s take a look.

Primer: How Does Inflation Work?

The dollar in your pocket doesn’t buy what it used to. That’s generally to be expected, and it isn’t always a bad thing, but the growing pains can sting depending on how you and your business are impacted. There are two types of inflation: demand-pull and cost-push.

  • Demand-Pull Inflation: The demand for goods and services exceeds production ability.
  • Cost-Push Inflation: The rising price of input goods and services increases the final price.

How is Inflation Measured?

The most common way to measure inflation is through the Consumer Price Index (CPI). It uses a standard set of consumer goods and services, known as a market basket, and measures the change in pricing over time. For example, BLS readings from January 2022 showed a 27 percent jump in energy prices over the previous 12 months. There was a seven percent rise in food prices over the same period. Medical care approached a three percent hike.

A jump in a single area or even a few doesn’t necessarily signal inflation. Rather, the overall cost of goods and services must be rising for the definition to be met. Generally speaking, inflation rates:

  • Below 2.3 percent is low.
  • Between 2.3 and 3.3 percent is mild.
  • Between 3.3 and 4.9 percent is high.
  • Above 4.9 percent is very high.

The U.S. Federal Reserve monitors inflation, sets a target of around two percent, and adjusts monetary policy if inflation veers too far from its two-percent target. In other words, it’s normal for last year’s dollar to be worth 98 cents today.

Why is Inflation Skyrocketing Now?

The cause of the inflation surge may not come as a surprise to most small business owners. Simply put, the country is experiencing a mix of both demand-pull inflation and cost-push inflation. On one hand, consumer demand for certain products and services skyrocketed amid the pandemic. Conversely, supply chain disruption caused the price of input goods and services to climb.

7 Proven Ways to Protect Your Small Business from Rising Inflation

Before we dig into the most common ways to protect a small business from inflation, it’s important to note that you should always bring your personal finance professional onboard before making any financial decisions. What works for one business may not work for another, and certain strategies are only appropriate under specific circumstances.

1. Understand How Inflation Affects Small Businesses

While there are generalities associated with inflation, it can still impact businesses in unique ways. For example, many, if not most, businesses will see less revenue because consumers must make their dollars go further. However, businesses producing essential goods aren’t impacted to the same degree.

Another aspect is the decision of whether to raise prices. Whereas large companies with brand recognition can often get away with a price increase, smaller businesses usually absorb increased costs to retain customers.

2. Budget for Inflation

Take a hard look at your expenses to see if you can cut back or reduce costs. A few options include:

  • Connect with suppliers to see if you qualify for better pricing or bulk discounts.
  • Take advantage of prompt pay discounts from suppliers/vendors and consider asking for same if not already being offered.
  • Renegotiate rent if your landlord is willing or move.
  • Cut back on discretionary spending.
  • Sublet unused space in your office or warehouse.

3. Invest in Assets That Beat the Effects of Inflation

While it’s important to keep cash on hand to run your business, any cash you hold will lose value in a period of inflation. Many traditional investment devices are the same. For example, traditional bonds and CDs aren’t generally good choices during periods of high inflation because they’re priced based on the fixed interest paid. Options with variable interest are generally better because they can rise with inflation.

The best bet, however, is appreciation-oriented assets, or assets that grow in value. Stocks, real estate, and raw land are common examples in the business sector. Options like cryptocurrency, rare art, and fine wine are leveraged as well.

4. Use Debt to Deal with Inflation

Employees usually receive wage increases to ensure their salaries keep up with inflation. By that token, a typical consumer could borrow a dollar today and then pay off their debt later with their higher wage.  Small businesses, of course, do not get automatic wage increases to keep up with inflation, but many business owners are raising their prices to cover their increased costs. It works the same in this sense. If your prices rise due to inflation, any debt you take on will likely be easier to pay off.

Bear in mind, however, that interest rates and fees tend to increase as borrower demand rises. Interest rate hikes are one way the Feds try to correct inflation extremes too. In these cases, lenders, rather than the borrowers, tend to come out on top.

5. Conduct an Energy Audit

Energy is almost always one of the first, fastest, and highest to climb. You can reduce your burden by performing an energy audit and acting on the items discovered. For example, installing insulation and performing maintenance on your heating and cooling systems are generally affordable and can have a lasting impact on energy costs.

6. Invest in Growth and Diversify

It’s often said that the best way an individual can fortify themselves against inflation is to invest in personal and professional development. Doing so can help a person develop new skills and become more marketable. As a small business owner, you may want to take some additional business courses or pick up new skills and knowledge you can apply to your company to help propel it forward.

It’s a good idea to apply the same concept to your business as well. Can you reach a new market? Diversify with different products? The broader your company’s reach is, the less it will be impacted by economic shifts.

7. Collect Debts (Invoices) Promptly

When you invoice your clients after goods or services are delivered, it’s essentially giving them an interest-free loan. During periods of high inflation, the money you collect later will be worth far less than it was worth when you delivered. Look for ways to improve your accounts receivable process, such as shortening payment terms or incentivizing prompt payments.

How Small Business Owners Can Accelerate Their Cash Flow with Charter Capital

As a small business owner, the cash you have in your hands today and how you manage it determines how your company weathers inflation. If slow-paying clients are preventing you from growing, investing, or fortifying your business against inflation, factoring can help small businesses by providing immediate B2B invoice payments. To learn more or get started, request a complimentary rate quote from Charter Capital.

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