What if forces beyond your control were threatening to destroy your business?
That may sound like the plot of a mystery novel or even a made-for-TV thriller. Unfortunately, for small businesses dealing with inflation, this is a daily reality!
While every business suffers from inflation, small businesses are hurt the hardest. In fact, 91% of small businesses report that inflation and related factors (such as supply chain issues) have negatively affected their businesses.
Unfortunately, there is nothing your own business can do to keep inflation from happening. But by studying and understanding the effects of inflation, you can develop strategies that might just save your business.
Ready to protect your own business from inflation? Are you prepared to give your business the protection it deserves? Keep reading to discover everything you need to know!
How Does Inflation Work?
Inflation refers to the cost of both services and goods going up over time. Over time, this can cause a lot of pressure on businesses as well as on consumers.
By itself, inflation is not necessarily that bad. The federal government aims for a 2% inflation each year. This is to help boost and support the economy.
However, recent inflation has been much more extreme. This January saw a 7.5% increase in inflation over last January. This was worse than the inflation of December 2021, and that inflation was already at a 40-year high.
This inflation is so bad due to several other factors. These factors include everything from rising energy costs to the rising costs of cars and trucks.
Many consumers have been hit very hard by inflation, especially because worker wages have remained relatively stagnant in recent years. And since small businesses rely heavily on the products and services of others, they have been hit the hardest by our current inflation.
How Interest and Inflation Work
Inflation would be bad enough for consumers and small businesses on its own. However, inflation's effect on interest rates makes everything that much worse.
Why? Think about it this way: the lender's ultimate goal is to make a profit. Therefore, lenders set specific interest rates because they have a certain return they are expecting to get.
Inflation means that, effectively, every dollar is worth less than it used to be. Because of this, lenders see less of a real rate of return. To put it simply, every percentage point that the interest goes up reduces that return by that same percentage for each dollar that is loaned out.
Still seeking profit, lenders do the logical thing and raise interest rates. This creates a real squeeze on consumers: when their money isn't worth what it once was, consumers must borrow more. But now they are saddled with debt and a high interest rate that is difficult to pay off.
As bad as this is for consumers, it is even worse for small businesses. These businesses require many different loans over the years. When a rise in loan interest rates coincide with consumers being unable to buy as much goods as they once did, it can be enough to put many smaller companies out of business.
Effects of Inflation On Small Businesses
So far, we have discussed in general terms how economic inflation hurts small businesses. However, it's important to know the effects your own business is likely to experience (or may already be experiencing) due to inflation.
While there are other inflation effects, the most common ones your business is likely to experience are rising costs, supply chain issues, reduced sales, and higher employee costs.
How do these different inflation effects happen, and what will they mean for your business? Let's take a closer look at each one!
Perhaps the biggest and most obvious effect of inflation on small businesses is rising costs. When your dollar doesn't go as far as it used to go, that means it is that much more expensive to run your business!
The expenses go up when the other businesses you rely on begin to increase their prices. As with lenders raising interest rates, companies selling different materials, products, and services must raise prices to stay in business.
You may be able to raise your own prices to compensate, but this can be a double-edged sword (more on this later). And even then, when everything you rely on costs more, it can be difficult to run your business as you once did.
By now, almost every consumer has experienced supply chain issues in recent years. Many of these supply chain issues are rooted in the COVID-19 pandemic that began in 2020. But the supply chain issues linger, and they continue to hurt small businesses.
That is because every company is dealing with inflation at the same time that you are. Companies may have difficulty producing the materials, products, and services they once made. And if they can still produce them, it may be in much smaller numbers than what they did before.
In extreme cases, a company that you relied on may go out of business due to inflation. This can further impact your business as you try to find another company to take care of your different supply needs.
Even if inflation didn't affect any other aspect of your business, it most likely impacted sales. Why? As we noted before, inflation means that no consumer's money is worth as much as it used to be worth.
This is why we hear stories about consumers cutting cable, eating out less, and generally spending less money. Many consumers have been forced to sell cars, move in with their parents, or take other major measures just to keep up with inflation.
It doesn't help that employee raises over the years have been few and far between. Now, inflation threatens to cancel out the raises that some employees received over time.
Long story short? Even your most loyal customers may not come in as much because they can no longer afford to do so.
Higher Employee Costs
Finally, you are going to experience higher employee costs due to inflation. That is due to the effects that we described above.
When your employees' wages aren't going as far as they used to, those employees are going to want higher wages. If you cannot offer that to them, those employees are going to seek work elsewhere.
Some reduction in employees is inevitable, and you may need to lay some staff off if your profits are suffering. But you can't run your business without employees, and you will likely need to increase what you pay and invest in things like robust workers' compensation to retain existing employees and recruit new ones.
What Caused the Current Inflation?
Much of our current extreme inflation is due to the COVID-19 pandemic. This led to supply issues, higher production costs, and increased consumer demand for certain products and services.
Ironically, some of our current inflation may be worse due to attempts to combat it. The government invested over $5 trillion to stimulate the economy and fight the economic effects of COVID.
This worked in the sense that consumers who were financially struggling now had more money to spend. But they had more money at the same time that businesses were still struggling with production and supply issues. This caused an increased consumer demand that ultimately made our current inflation that much worse.
Strategies To Help With Economic Inflation
As we said before, there is nothing your own business can do to prevent inflation. But there are specific steps you can take to help your business fight the effects of inflation.
What steps should you take? You should research and understand inflation, plan for the long-term, and reduce both inventory and employees. You also need to focus on sales while changing up your pricing strategies and reexamining your expenses.
How does all of this work, and what can your small business do to fight inflation? Let's take a closer look at each strategy.
Do Your Homework
Here's a bit of good news: one of the best strategies to fight against inflation is something you are doing right now!
To fight against inflation, you must first understand how it works. And you need to seek out any resources that might help you fight inflation's effects.
Before you take any actions such as raising prices or laying staff off, you need to investigate the short- and long-term consequences these actions can have. The last thing you want to do is take action today that will actually hurt your business by next year.
Never be afraid to collaborate with other entrepreneurs and other authority figures. By going in with a solid game plan, you can effectively fight inflation and set your business apart from the competition.
Reexamine Your Expenses
It's always important for your small business to find ways to save money. But amid major inflation, it's more important than ever for you to examine your expenses.
Are there ways you can automate your business and streamline it with technology? Or delegate responsibilities better so that you require fewer employees? Can you switch to cheaper vendors for any of your needs?
No one set of solutions is right for every business. But if you find ways to save your own business money, you can make each dollar go further when doing so is more important than ever before.
Revise Your Pricing Strategy
To survive and even thrive during inflation, you need to revise your pricing strategy. In many cases, this means going beyond simply raising prices.
Raising prices is a logical solution in the face of inflation. However, you may not be able to raise prices much (if at all) without losing your customers to the competition. The good news is that you can take alternative steps instead of raising your prices.
For example, you could try to market your products and services to a different demographic. This alone can help to increase your sales. And if that demographic is more affluent (and therefore less affected by inflation), your business will be more secure.
You might also try selling products and services that offer you higher margins. This helps to boost your bottom line, and changing up what you sell is another way you can appeal to a more diverse set of customers.
Better Long-Term Planning
Long-term planning is always useful for a small business. But when you're in the grip of inflation, solid planning can be the difference between success and failure for your business.
For example, many businesses wait until they need something to try to get it. Whether these are new materials, new loans, or even extra business insurance, they put it off until the need arises.
During inflation, though, it can be harder to get almost anything your business needs. So you should start thinking many months ahead to get what you might need by the time you need it.
Don't worry too much about getting something for your business and not needing it. As always, it's better to not need something and have it than to not have something and need it!
We have discussed how inflation keeps customers from buying as much as they once did. Because of this, you should strongly consider reducing your inventory.
This goes hand in hand with doing your research on how inflation has specifically affected your business. If you are still producing inventory as you did before inflation hit, you are likely to have a lot of unwanted and unused products sitting around.
It all depends on what your sales are looking like. So while you will likely need to reduce inventory, it's important to make sure you are still keeping track of consumer demand and setting your inventory accordingly.
From workers to small businesses, nobody likes layoffs. But when small businesses are affected by inflation, they may have no other choice but to reduce their number of employees.
You should never rush into this process, though. If you lay off too many employees, you may be shooting your own business in the foot. But if you don't lay off enough employees, you'll be stuck with the same problem you had before: too many workers and not enough money to go around.
Layoffs, then, should be part of your long-term planning. By correctly estimating how many employees you will need in the coming months, you can reduce your staff while still meeting consumer demand.
Focus On Sales
The most straightforward solution to inflation is boosting your sales. However, this is often easier said than done for small businesses.
One "rookie mistake" your business should avoid is trying to market to brand new customers during this time. Unless you are specifically trying to diversify your consumer base, you are better off trying to retain your existing customers. That's because it is so much more expensive to win over new customers than to keep your old ones.
To retain customers, consider adding business features they would appreciate. This may include things like online ordering options and customer loyalty bonuses. Of course, it doesn't hurt to offer referral bonuses: these keep existing customers happy while encouraging them to bring new customers in!
Effects Of a Disrupted Supply Chain
We have covered how economic inflation and supply chain disruption go hand in hand. Inflation alone can be enough to disrupt the supply chain. In turn, when the chain is disrupted (especially for a long time), it can make inflation worse.
With that being said, supply chain disruptions carry their own set of negative consequences for small businesses. If you don't know what these effects are, your own business may be caught unaware.
Now, let's take a closer look at the different effects of a disrupted supply chain on businesses just like yours!
Failure To Meet Customer Demands
The largest effect of supply chain disruptions is that businesses fail to meet customer demands. In other words, customers want what they want and they want it right away. When customers have to wait a long time or they can't get what they want, they are likelier to turn to a competitor.
In this case, the main competition is likely to be located online. Customers have gotten quite spoiled at the ability to order something from Amazon and receive it within a couple of days. Therefore, the primary benefit of shopping at a local business is that they can receive their products right away.
When even the local businesses are making customers wait due to the supply chain, those customers are likely to go online for their needs. Worse, they may never return to the local businesses they once supported.
Inability To Get Needed Products and Services
When it comes to the materials, products, and services your business needs, you become the customer. And just like other customers, you may not be able to get what you need when you need it.
It's best to turn this effect of supply chain disruption into an opportunity. For example, when you can't get supplies from one vendor, this is your chance to find another vendor. If you're lucky, the new vendor will be both cheaper and more reliable!
It may be uncomfortable at first to abandon vendors you have used for someone new. But when dealing with inflation and supply chain problems, the most important thing is taking care of your own business.
Forced To Change Products
One of the more predictable effects of a supply chain disruption is that businesses are forced to change products. When a business can no longer get the materials they need, they must make do with the materials they can get.
This, too, can be an opportunity for your business. Instead of being annoyed that you can no longer sell your old products, look at this as a chance to sell something new.
As we discussed before, this is also a chance for you to sell products with a higher profit margin. The trick is to develop new products that will appeal to your existing customers while also giving you a chance to branch out to new demographics.
Depending on your business, you may rely extensively on specialized machinery and other equipment. Unfortunately, supply chain disruptions mean that you may experience maintenance problems.
There are two primary reasons these maintenance problems occur. The first is that those who maintain your products may have trouble getting their own supplies. Without these supplies, repairing and maintaining your equipment may be impossible.
And maintenance companies may be laying off some of their own staff due to inflation. In that case, there may simply not be enough maintenance workers to keep up with all the demand!
You can mitigate this issue somewhat by learning to maintain your own equipment. But you will still face challenges when it comes to getting the maintenance supplies you need.
Drastic Changes In What You Sell
It's one thing to temporarily change up what your business is selling. But when inflation and supply chain issues get bad enough, you may have to stop selling certain products entirely.
While this is sometimes necessary, try to think of this as an emergency option for your business. That is because many customers associate your business with certain products. When you stop selling those products, many customers are going to stop coming into your store.
With creativity and a bit of luck, you may be able to successfully pivot to new products altogether. But we recommend not trying this solution unless it is absolutely necessary.
Protect Your Business Today
Now you know more about the effects of inflation on small businesses. But do you know how to protect your business from the unexpected?
Here at Hummel, we offer solutions to your business needs, including reliable commercial insurance, health & employee benefits, and financial services. To see what we can do for you and your company, just contact us today!