Rising prices have been making headlines and forcing both business owners and everyday workers to make tough decisions. Inflation rose 7.5% in January 2022, the highest rate in 40 years. Although everyone has felt the effects of inflation in recent months (especially drivers), small business owners often bear the brunt of inflation’s impacts.
Inflation has a lot of consequences on the economy. First and foremost, as the cost of retail products and services rises, it erodes purchasing power. It can also raise borrowing costs when interest rates rise.
Inflationary pressures can feed on themselves, generating a feedback loop. Because people are spending more quickly, the supply of money exceeds demand, causing the currency’s buying power to collapse even more quickly.
How inflation affects small businesses
Inflation poses three main problems for small business owners. First, it causes consumers to be more cautious and spend less, reducing small businesses’ revenues.
Second, the purchasing power of your money decreases, meaning the real value of your money is lower than it was before inflation. Finally, supplies and labor end up more expensive than they were just months before. All of these factors lead to lower profit margins for small businesses.
While you may already be feeling inflation pressures, it is possible that inflation has not yet impacted your small business. Inflation ripples through the economy in different ways and at different times, impacting each business in unique ways.
The immediate impacts of inflation are supply shortages that prevent finished goods from being completed. Consider, for example, how Ford has thousands of nearly finished but still unsellable F150 pickups waiting for computer chips to come in.
Manufacturers large and small can have millions tied up in inventory-in-process while awaiting precious parts to come in. Those who embraced the industry best-practice of Just In Time Manufacturing (JIT) are especially vulnerable today to shortages.
How to manage inflation in your small business.
Inventory Your Staff
Payroll is often one of the top costs a small business owner has, so it makes sense to ensure that the money is well spent. This may involve a thorough review of staff—both when a problem arises and during the normal course of business—to ensure that the right people are on board and doing their jobs effectively.
Refinance your debt
As of writing, mortgage rates are about 3%, and interest rates on a typical bank loan are anywhere from 2.5% to 7%. But rates are going up in 2022. So now is the time to lock in lower rates and convert your short-term debt to something longer-term.
Lock in long-term agreements
If your suppliers are willing, then lock in a longer-term supply arrangement. If your landlord wants to keep you as a tenant, talk about a longer-term lease with agreed-on, fixed increases. The same goes for higher-compensated employees: Look to lock in your relationship with a contract.
Focus On Efficiency And Productivity
Wages and salaries are going up during inflationary times (which is a real nightmare for businesses). Spend time improving your processes. Look for areas of waste. Spend quality time thinking about and then implementing how work can be done more efficiently.
Become Aggressive With Frequent Small Price Increases
Your customers can deal with more modest price increases that become significant increases over time better than one big jump. It’s hard to believe inflation is going to keep increasing. However, for those who managed a business in the 80s and experienced savings accounts paying 16% and mortgage interest rates at 18%, they know this can keep growing.
We have always emphasized the importance of having a good website for your company because it can act as your best tool for marketing and sales. A poorly designed website can repulse people from your business and can cause you to lose customers before you even have them. Get in touch with HyperEffects to work on creating, enhancing, and making the website of your company more user-friendly.