If you pay any attention to business news, you know inflation is at the highest it’s been in the past four decades. While the world has experienced many high inflation periods, the current situation is among the most grueling for several reasons.
The world is still recovering from a pandemic and its effects on the supply chain continue to be felt across various industries in the form of worrying shortages. As if that wasn’t enough, war broke out across Ukraine just as some progress happened within the last year. The resulting global sanctions, particularly those coming from Washington, D.C., on one of the world’s largest oil and gas producers had a massive impact on price increases across several markets.
Slowly but surely, the perfect storm formed, and prices started skyrocketing at a rarely seen pace. Energy prices are at all-time highs and food, rent, entertainment, gas prices, and overall living costs are increasing at record levels, especially compared to 2020 and 2021.
But while this can hit the average consumer hard, it can hit entrepreneurs even harder. Around 85% of small businesses are concerned about inflation, according to a U.S. Chamber of Commerce survey. One in three business owners indicates that beating inflation is their number one priority.
If you’re a small business owner, today’s economy has made it imperative to learn what inflation is and how to prevent it from ruining your profits.
Inflation is a natural period of decline for an economy. The term refers to a process of declining buying power due to the rising cost of goods and services and a devaluation of a currency.
Inflationary spikes can happen in many industries at any time. But the real danger for small businesses is when inflation affects the whole economy as it has in 2022.
Everything from rent to food to electricity to gas and everything in between has seen an accelerated price growth. While 2% annual inflation is still considered optimal for economic growth, a 5% or higher rate, which is what the U.S. economy has been experiencing for the past year, is bad.
Businesses struggle to keep up with higher costs that eat away at their profit margins.
Since most of the U.S. economy is made up of small businesses, learning how to adjust your company’s finances to survive and thrive during periods of high inflation should be at the top of your to-do list.
There are at least seven strategies you need to implement quickly into your business to reduce the effect of inflation on your company’s financials.
When profit margins decrease due to inflation, many small business owners respond by raising their prices. It’s almost instinctive.
This accomplishes two things. First, it can help businesses retain their pre-inflation profit margins and stay in the green when it comes to cash flow.
However, this increase in consumer prices shifts the financial pressure onto customers. This can be an issue during periods of high inflation as businesses aren’t the only ones feeling the effects. The consumer’s buying power is already lower than before.
Therefore, raising your prices can cause your business to lose customers and clients, as many are unlikely to be able to afford your new prices.
This won’t always be the case. But it shows that simply raising prices might not be the best strategy for all small businesses.
Another strategy you can try involves implementing a subscription pricing model. Many businesses can use subscriptions to boost their revenue while giving customers the option of a lower entry level.
Subscriptions typically allow you to shift prices without making your products or services more expensive for the consumer and ultimately enjoy a higher customer retention rate.
Inflation tends to hit smaller businesses harder because they have lower profit margins and less capital. This is true of any sector.
But one of the keys to adjusting business finances for inflation is understanding your expenses, revenue, and profits. Where does the money come from, how does it flow through your business, and where is it going?
The only way you can get a better understanding of your business finances is to audit the business.
Internal audits should occur periodically whether or not your business is thriving. But you might need to accelerate the timetable on your next planned audit if inflation threatens your company.
Look at your financial reports to learn how you spend capital and cash flow. Your main goal is to identify expenses you can adjust that won’t impact the customer experience negatively.
In essence, you could look for ways to improve your operating margins and cut unnecessary expenses. You can even try implementing new social media digital marketing strategies, partnering with new vendors and distributors, renegotiating insurance policies, postponing taking out new loans, etc.
Auditing your business will allow you to identify all expenses and separate essential from non-essential outgoings.
After you audit your company’s financials, you’ll have a better understanding of how you’re spending money and how inflation is affecting you regarding raw materials, utilities, and services.
This is a perfect time to focus on increasing profitability.
Again, businesses in various sectors have different operating models, products, services, and ways to increase profitability.
Here’s an example. If you were a retailer and wanted to avoid raising your prices, you could increase your order size and buy more inventory in bulk to get your products cheaper, despite the inflationary effect. Bulk purchasing reduces the cost per unit.
You might end up with more inventory than before, but maintaining your prices during high inflation can help you retain and gain new customers.
Another way to address profitability is eliminating services and products that aren’t popular with your customers. Anything that isn’t a top seller could be shelved for a while so you can increase the production of your best-selling items. If you’re in SaaS, you can focus on improving the delivery of your most popular services.
What can you do if inflation is affecting your business, but you don’t have an in-house financial team? What if you don’t have the financial expertise to manage your finances during a rough economy?
If this is happening to you, it’s time to talk to some experts.
When business is booming, and you’re profitable, you might not be tempted to work with financial experts such as business advisors, bookkeepers, and accountants. You don’t have to go out of your way to talk to seasoned economists, but should rely on subject matter experts that can help you weather inflationary pressures.
But when inflation is high, your financial knowledge can make or break the business.
After all, auditing your business finances accomplishes nothing if you don’t understand the numbers in front of you. You must learn to read the information in those reports.
Unfortunately, if you don’t have a solid financial background, you won’t be in a position to make the best financial decisions with the available information.
Given the urgency to address your situation during inflation, teaming up with experts that can explain what’s happening in your books is a good idea. A service such as Swyft Books can help you identify waste and unnecessary expenses and recommend how to redirect your spending to remain profitable and weather the inflation storm.
Looking at your competitors for inspiration is a good idea when inflation is chomping away at your profits. Some are likely doing just fine or thriving in this environment. You must research the market to determine what they’re doing differently.
You should figure out how to increase the value of your offerings without incurring additional costs or cutting down your profit and operating margins.
This may include offering complimentary services, and bundling various products and services together. Generally, it’s all about providing more value to keep customers interested in buying, even at a higher price point.
Many businesses rely heavily on employees to do everything from crucial business operations to administrative tasks.
But sometimes, this isn’t the best course of action. Small businesses, in particular, can tie up too much of their cash flow in labor costs.
There’s also the issue of hiring people with arguably less expertise to fill positions your company may not need.
Just as many consumers use SaaS businesses to solve their issues, companies can also use third-party service providers for various administrative, marketing, and, as previously mentioned, accounting and financial tasks.
If business was great until inflation hit, it’s unlikely you’ve given automation and outsourcing much thought. But now, you have to start managing the budget better and tighten your belt.
Using third-party automation services and outsourcing some of your tasks will arguably be cheaper than hiring full-time employees you have to pay even on days they aren’t doing anything important.
Outsourcing and automation are big money savers for small, medium-sized, and enterprise-level businesses. Looking at these options during high inflationary periods might be even more essential than when the economy is strong and business is booming.
Focusing on growth may seem counterintuitive when inflation is increasing prices across the board. But here’s something you must consider. Not every business model is built to outpace inflation. Depending on your industry and niche, you might face much greater challenges than other companies.
Growth, expansion, or pivoting in new directions can positively affect your cash flow.
Scaling your operations could help you reduce expenses and increase profit margins. If you combine this with good customer retention and even better acquisition, your business can thrive in a high inflation economy.
Pivoting and exploring new revenue streams or targeting new audiences can open up new avenues to make money.
Of course, growth and pivoting must be calculated and executed with the utmost precision. That doesn’t mean it’s impossible. It’s just one of many ways, albeit harder, to overcome inflation and protect your finances during high inflation.
One of the most important things to keep in mind is to keep a level head. Inflation is not new or a once-in-a-lifetime event. Periods of inflation happen all the time, and some will have a more substantial impact. Yes, it can be hard to weather a hike in the inflation rate, but many entrepreneurs have done so before, and so can you.
Remember, too, that inflation has plenty of positive effects and is necessary to keep the economy healthy. Your biggest concern is finding the best strategies to manage your finances during times of hardship to come out the other end unscathed.
Perhaps this is one area where you need more assistance compared to others. If that’s the case, don’t hesitate to reach out to bookkeeping and accounting services to learn more about your business finances and how to strengthen them.