The Impact of Inflation on Small Businesses and How to Manage It

Inflation is hitting small businesses hard right now—data from MetLife and the U.S. Chamber of Commerce found that 85% of small-business owners surveyed expressed concern about inflation. And 1 in 3 listed inflation as their top business concern.

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.

Many people treat inflation as a bad thing, but inflation is always happening. For instance, if you had $100,000 in a savings account in 2002, that money won’t go nearly as far in 2022.

The Federal Reserve actually aims for an inflation rate of 2% per year because if inflation is too low, it weakens the economy. However, inflation becomes a financial burden for consumers and businesses when it is too high.

How Inflation Affects Small Businesses

Since the pandemic began, businesses have been struggling to deal with the rising costs of inflation. Covid-19 just fast-tracked the inevitable—ongoing supply chain issues made it harder to access goods, which drove up the prices.

Here are some of the most significant ways small businesses have been impacted by inflation:

• Higher costs: According to a Business.org survey, 92% of small-business owners surveyed have dealt with rising costs since the beginning of the pandemic. The supplies and services you need to run your business are more expensive, and 26% have seen their costs rise by 20%.
• Rising prices: Because running a business is more costly, over 80% of small-business owners have increased their prices in an attempt to counter inflation. Of course, this can be a risky move since some of your customers may not accept these higher price points.
• Cutting overhead expenses: In addition to raising prices, cutting your overhead costs can be a good way to manage inflation. Many business owners have been forced to reduce their inventory, cut marketing costs and look for other ways to save money.
• Tighter profit margins: And finally, rising costs often result in tighter profit margins. This makes it harder for businesses to reach their margins and remain profitable over time.

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. And the first choice small-business owners need to make is whether they want to stay small or focus on growth.

Businesses have two options in today’s business environment—stay lean and mean or commit to growth. At this point, it’s hard to manage anything in between these two choices.

If you deliberately decide to stay small, you’ll want to focus on keeping your expenses low. Cut back on all nonessentials and look for ways to reduce your production costs.

Any money you save will improve your cash flow. You can also look for ways to spend more time marketing to your current customers to boost sales.

But saving money isn’t enough on its own—you also need to focus on investing your money. You need a way to multiply your money inside your business and outside of your business, and those investments need to be outpacing or, at the very least, keeping up with inflation.

Another option is to focus on growth so you can generate enough revenue to stay ahead of inflation and your competition. You can increase your marketing, revisit your pricing strategy and invest in your business. For instance, investing in technology can help you improve your productivity and get some of your overhead costs under control.

One way you can continue investing in your business is by taking out a small-business loan or line of credit. The Federal Reserve approved its first interest rate hike in two years in March. However, we’re expected to see six more hikes in 2022. That means you shouldn’t wait to take out a loan until you need one—applying now is your best bet for securing a low rate.

When Will High Inflation Come to an End?

Inflation doesn’t stop—it’s a reality you’re constantly dealing with. The best thing you can do is to make choices about how you’ll manage this situation in your business.

You can choose to maximize your profits by staying small and cutting your expenses wherever possible. You can also choose to focus on investing in your business and growing quickly. There is no one right answer—it also comes down to your priorities as a business owner. For me, I’m always committed to growing myself and my company to the next level.

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